63182 FINAL REPORT Study on Financing the Destruction of Unwanted Ozone-Depleting Substances through the Voluntary Carbon Market Study on Financing the Destruction of Unwanted Ozone-Depleting Substances through the Voluntary Carbon Market Final Report February 2010 Funded by: The Multilateral Fund Commissioned by: The World Bank Prepared by: ICF International This report was prepared by ICF International with direction from the World Bank’s Montreal Protocol Unit and the project team: Steve Gorman, Viraj Vithoontien, Julie Godin and Mary-Ellen Foley. Funding for the development of the study and related consultations was provided by the Multilateral Fund for the Implementation of the Montreal Protocol on Substances that Deplete the Ozone Layer. The World Bank Montreal Protocol Unit would like to thank in particular, members of the Steering Committee —created to provide guidance during the development of the study—for their valuable feedback and insight: Philippe Ambrosi (Carbon Finance, World Bank); Husamuddin Ahmadzai (Senior Adviser Department of Enforcement and Implementation, Swedish EPA); Derek Broekhoff (Vice President, Policy, Climate Action Japan); Abe Finkelstein (Chief, Innovative Solutions Division, Environment Canada); Bella Maranion (Analyst, US EPA); Stephen McComb (Economist, Chicago Climate Exchange, Inc.); Agustin Sanchez-Guevara (Ozone Unit Coordinator, SEMARNAT, Mexico); and Jerry Seager (Program Manager, Voluntary Carbon Standard Association) study were also provided by UNEP-DTIE’s OzonAction Branch. Finally, the authors and the Montreal Protocol Appendix A for the information and input provided. Cover photos courtesy of the World Bank Photo Library Photos on title page and chapter opening pages courtesy of Knud Nielsen (Recycled Fridge Dump), Leenvdb (Polystyrene Foam with Earth Waste), and the World Bank Photo Library (Factory Smokestacks). Additional photos on text pages courtesy of the World Bank Photo Library. Cover design: The Word Express, Inc., Reston, Virginia Printed: May 2010 Printed on recycled paper. Table of Contents Acronyms | vii Executive Summary | ix Is There a Market for ODS Destruction? | x Towards a Global Program for ODS Destruction: How Can We Capitalize on the Existing Montreal Protocol Infrastructure? | xi What Challenges and Gaps Might Be Faced Through Reliance on the Voluntary Carbon Market? | xii 1. Introduction | 1 2. Background: Why Is Funding Needed for ODS Destruction? | 3 2.1 Why Destroy ODS? | 3 2.2 Constraints on the Recovery and Destruction of ODS: The Need for Funding | 4 3. Possible Options for Financing ODS Destruction | 7 3.1 Multilateral Fund | 7 3.2 Other Multilateral Organizations and Funding Mechanisms | 8 3.3 Other Schemes for Financing ODS Destruction | 8 3.4 The Voluntary Carbon Market | 9 4. Understanding the Carbon Market | 11 4.1 Compliance Markets | 11 4.2 Voluntary Markets | 13 5. Accessing the Voluntary Market for ODS Destruction | 19 5.1 How the Voluntary Market Would Work for ODS Destruction | 19 5.2 Existing and Upcoming Opportunities for ODS Destruction on the Voluntary Market | 20 6. Potential Impact of ODS Destruction on the Voluntary Market | 27 7. Financial Feasibility of Financing through the Voluntary Market | 31 7.1 Availability of Resources from the Voluntary Carbon Market | 31 7.2 Cost of an ODS Destruction Project | 35 8. Methodologies for ODS Destruction in the Voluntary Market | 41 8.1 Sources of ODS and Project Scenarios | 42 8.2 Elements for a Robust ODS Destruction Methodology | 44 8.3 Comparison of Known ODS Destruction Methodologies | 47 FINAL REPORT iii TA B L E O F C O N T E N T S 9. Challenges and Potential Solutions | 55 9.1 Avoiding Perverse Incentives and Unintended Consequences | 55 9.2 Addressing ODS Not Covered by the Voluntary Market | 57 9.3 Dealing with Challenges for Buyers and Sellers in the Voluntary Market | 57 9.4 Obtaining Financing for ODS Destruction Projects with Low Cost-effectiveness | 58 9.5 Addressing Special Needs of Some Article 5 Countries | 60 9.6 Restrictions on Export/Import of ODS for Destruction and Accessing ODS Destruction Capabilities | 61 10. Towards a Comprehensive Strategy for Financing ODS Destruction through the Voluntary Market | 63 10.1 Is There a Market for ODS Destruction? | 63 10.2 Capitalizing on the Existing Montreal Protocol Infrastructure | 65 10.3 Strategies to Minimize Costs and Maximize Revenues | 66 10.4 Gaps Remaining Through Reliance on the Voluntary Market | 67 References | 69 Appendix A: Case Studies | 73 Indonesia: Upgrading a Cement Kiln to Destroy ODS | 74 Argentina: Efforts to Export CTC for Destruction | 79 Russia: Program to Collect and Destroy ODS in Domestic Refrigerators | 81 Gulf Cooperation Council: Destruction of ODS | 84 Earning Carbon Credits under CCX for the Destruction of ODS | 88 Appendix B: Terms of Reference for the Study | 91 Appendix C: Methodology for Estimating ODS Potentially Available for Destruction from Retired Equipment at End-of-Life | 97 Appendix D: Applicable Templates for Developing ODS Destruction Projects | 99 iv Study on Financing the Destruction of Unwanted ODS TA B L E O F C O N T E N T S List of Tables, Figures and Exhibits Tables: Table 1: Rules and Procedures in CCX, VCS, and the Reserve | 22–24 Table 2: Unit Cost for Destruction of ODS from Reachable Banks Requiring Low or Medium Effort (all Costs Shown in US$ per kg, unless otherwise Indicated) | 36 Table 3: Indicative Transaction Costs for Project Preparation and Registration | 37 Table 4: Example ODS Destruction Project Cost Calculations | 38 Table 5: Criteria and Recommendations for a Robust and Widely Applicable Methodology | 45–46 Table 6: Comparison of Selected Methodologies and Approach | 48–49 Table 7: Examples of Tax Revenue Generated per Project (All Costs and Revenues Shown in Thousands of US$) | 59 Table 8: Summary of Strategies for Improving the Opportunity for Financing ODS Destruction through the Voluntary Market, and Associated Roles | 65 Table 11: Estimated ODS Banks in Equipment in the Gulf Region | 85 Table 12: Costs for the Destruction of Unwanted ODS | 89 Figures: Figure ES-1: Comparing ODS Potentially Available and Eligible for Destruction (Bars) with the Projected Volume of the Voluntary Market (Diamonds), in Millions of Tonnes of Carbon Dioxide Equivalent | xi Figure 1: The ODS Destruction Process | 5 Figure 2: Structure of the Carbon Market | 11 Figure 3: Volume Comparison of the Project-based Compliance and Voluntary Markets | 12 Figure 4: Relative Size (Value) of the OTC and CCX Components of the Voluntary Market | 14 Figure 5: Volume Growth in the Voluntary Carbon Market | 14 Figure 6: Voluntary Carbon Market Structure | 16 Figure 7: Voluntary Market Project Cycle | 16 Figure 8: ODS Potentially Available for Destruction from Retired Equipment at End-of-Life in Millions of tCO2e, Assuming a 10% Recovery Rate (2010–2050) | 29 Figure 9: Comparing ODS Potentially Available and Eligible for Destruction (Bars) with the Projected Volume of the Voluntary Market (Diamonds), in Millions of Tonnes of Carbon Dioxide Equivalent | 30 Figure 10: Credit Price Ranges and Averages by Project Type, OTC 2008 | 34 Figure 11: ODS Destruction Project Break-even Costs Compared to the Average Price for an Industrial Gas Carbon Credit | 39 Figure 12: The Process of ODS Destruction and Illustrative Recordkeeping Requirements | 52 Figure 13: Holcim Indonesia’s Narogong Plant | 75 Figure 14: The ODS injection piping (left) and connection into the burner (right) | 76 Figure 15: ODS destruction at the Holcim Narogong cement kiln | 77 Figure 16: ODS stockpile stored in cylinders | 84 Figure 17: A PLASCON® plasma arc destruction unit | 86 Figure 18: One of RemTec’s multimodal shipping tanks, used for shipping refrigerant by rail, ship, or truck | 86 Figure 19: Rotary Kiln at Clean Harbors’ Facility | 89 FINAL REPORT v TA B L E O F C O N T E N T S Exhibits: Exhibit ES-1: Geographical Scope of ODS Destruction Programs | x Exhibit ES-2: Future Outlook for the Voluntary Carbon Market | x Exhibit ES-3: Strategies to Minimize Costs and Maximize Revenues | xiii Exhibit 1: ODPs and GWPs of Common ODS | 3 Exhibit 2: Other Barriers to ODS Destruction | 6 Exhibit 3: Third-Party Standards | 14 Exhibit 4: ODS Recoverable from Equipment/Products in Practice | 28 Exhibit 5: Pre-CDM VERs | 33 vi Study on Financing the Destruction of Unwanted ODS Acronyms A5 [Parties] Operating Under Article 5 Paragraph 1 of the Montreal Protocol AAUs Assigned Amount Units AC Air Conditioning ACT Air Control Testing, Inc. AHRI Air-Conditioning, Heating and Refrigeration Institute AMS Approved Methodology for a small scale CDM project activity AR4 Fourth Assessment Report of the Intergovernmental Panel on Climate Change CAAA U.S. Clean Air Act Amendments CCX Chicago Climate Exchange CDM Clean Development Mechanism CFI Carbon Financial Instrument CH4 Methane CO2 Carbon Dioxide CRT Climate Reserve Tonne (1+tCO2e) CTC Carbon Tetrachloride EB Executive Board of the Clean Development Mechanism EOL End-of-Life EPA Environmental Protection Agency (US) ERU Emission Reduction Units EU European Union EUA EU Allowances EU ETS European Union Emission Trading Scheme ExCom Executive Committee of the Multilateral Fund for the Implementation of the Montreal Protocol FIASA Frío Industrias Argentinas, SA FINRA Financial Industry Regulatory Authority (US) GC Gas Chromatography GCC Gulf Cooperation Council, also known as the Cooperation Council for the Arab States of the Gulf GEF Global Environment Facility GHG Greenhouse Gas GWP 100-year Global Warming Potential, with the GWP of Carbon Dioxide Fixed at 1 IFIs International Financial Institutions IPCC Intergovernmental Panel on Climate Change ISO International Organization for Standardization JI Joint Implementation, a Flexibility Mechanism of the Kyoto Protocol KLH Indonesian Ministry of Environment LVCCs Low-volume Consuming Countries FINAL REPORT vii ACRONYMS MOE Japanese Ministry of Environment MLF Multilateral Fund for the Implementation of the Montreal Protocol MT Metric Tonnes MtCO2e Million Tonnes of Carbon Dioxide Equivalent N2O Nitrous Oxide NEFCO Nordic Environmental Financing Corporation NGO Non-governmental organization Non-A5 [Parties] Not Operating Under Article 5 Paragraph 1 of the Montreal Protocol NOU National Ozone Unit ODP Ozone Depleting Potential ODS Ozone-Depleting Substance(s) OEWG Open-Ended Working Group of the Parties to the Montreal Protocol OTC Over the Counter (Sales of Carbon Credits) PCBs Polychlorinated Biphenyls PDD Project Design Document PIN Project Idea Note POPs Persistent Organic Pollutants RCRA U.S. Resource Conservation and Recovery Act The Reserve Climate Action Reserve RGGI Regional Greenhouse Gas Initiative SSRs Sources, sinks, and reservoirs tCO2e Tonnes of Carbon Dioxide Equivalent TEAP Technology and Economic Assessment Panel UNDP United Nations Development Programme UNEP United Nations Environment Programme UNFCCC UN Framework Convention on Climate Change UNIDO United Nations Industrial Development Organization WEEE EU Waste Electrical and Electronic Equipment legislation VCM Voluntary carbon market VCS Voluntary Carbon Standard viii Study on Financing the Destruction of Unwanted ODS EXECUTIVE SUMMARY While the Montreal Protocol has achieved remarkable success in reducing the production and consump- products, and stockpiles. Because emissions from ODS banks are not explicitly controlled by the Montreal Protocol, there is a risk that these ODS could be released to the atmosphere if legislation or other incen- ODS through the voluntary carbon market,1 as commissioned by the Multilateral Fund Executive Committee through Decision 54/10(d). that can be earned, and buyers pay for real and for destroying ODS through the voluntary carbon market. The high global warming potential (GWP) of ODS that would have otherwise been emitted. A of ODS means that their destruction has the ability number of challenges and gaps exist, however, for which could then be sold in the voluntary carbon broadly across all countries, project types and market. Because little ODS is currently recovered project sizes. These challenges must be considered at equipment end-of-life, the possibility of earning in designing a comprehensive strategy for ensur- - ing the recovery and destruction of unwanted nancial incentive for recovery and destruction of ODS. unwanted ODS, which would likely otherwise be eventually released to the atmosphere. In addition, The remainder of the Executive Summary answers by capitalizing on the existing Montreal Protocol in- - frastructure and institutions, and through supporting nancing ODS destruction through the voluntary car- mechanisms to assist in the process of bringing ODS bon market: destruction projects to market, new opportunities can be promoted and facilitated. Is there a market for ODS destruction? How can we capitalize on the existing Montreal Using the voluntary market is likely a win-win op- Protocol infrastructure? portunity; incentives are created for the recovery What challenges and gaps might be faced and destruction of ODS through the carbon credits through reliance on the voluntary carbon market? 1 The global carbon market can be broadly divided into two key segments—the compliance market and the voluntary market—the latter of which is the focus of this report. The voluntary carbon market operates outside of compliance mar- kets and allows organizations to offset carbon emissions on a voluntary basis. FINAL REPORT ix E X E C U T I V E S U M M A RY Is There a Market for ODS Destruction? As of early February 2010, the Chicago Climate Exchange (CCX) offers carbon credits for ODS This question is fundamental to whether the volun- destruction projects, and the Voluntary Carbon - Standard (VCS) nancing ODS destruction: there must be some basic program to cover ODS destruction projects by market structure to support ODS destruction and suf- publishing a series of eligibility criteria. In late February 2010, the Climate Action Reserve (Re- ODS destruction projects in order for the scheme to serve) adopted two new offset project proto- work. cols (that will serve as methodologies) for ODS destruction. Basic Market Structure Three standards now offer credits for ODS de- At the most basic level, in order for ODS destruction struction projects. With regard to available projects to be credited, there must be greenhouse methodologies, CCX already offers a project gas (GHG) programs covering ODS—i.e., third-party protocol to guide ODS destruction projects and voluntary standards that offer carbon credits for the Reserve has two project protocols to be projects that destroy ODS—and methodologies to used for ODS destruction for materials originat- guide those ODS projects. ing in the United States or imported from Article 5 (A5) countries. VCS will rely on the submission of ODS destruction methodologies by project proponents and other entities, and several Exhibit ES–1 Geographical Scope of ODS Destruction Programs methodologies have already been submitted. CCX: Destruction must occur within U.S. borders; material im- Among the three standards, the geographical ported to the U.S. for destruction is also eligible. scope of the ODS destruction program differs, The Reserve: Destruction must occur within U.S. borders; mate- as described in Exhibit ES-1, and some may pro- rial imported from an A5 country to the U.S. for destruction is also eligible. vide a more restricted opportunity for participa- VCS: Destruction can occur in any country that can meet tion by all Parties to the Montreal Protocol. technical requirements. Demand for ODS Destruction Credits - mand in the voluntary market for ODS destruction, it Exhibit ES–2 Future Outlook for the Voluntary Carbon Market The voluntary market is projected to grow on average about the volume of ODS destruction projects that could 15% per year over the next decade, based on a survey of over be registered and the overall projected size of the 100 voluntary market participants conducted by Hamilton et al. market. (2009). This growth could potentially be mitigated by the expan- sion of the EU ETS into additional sectors and the passage of U.S. compliance market, both events which could reduce the pre- There could be a substantial amount of ODS compliance demand in the voluntary market. available for destruction in both A5 and non-A5 countries, depending on the rate of recovery. Another source of demand for credits from ODS destruction proj- Given currently low rates of recovery, ODS de- ects could be from the offset provisions in U.S. climate legisla- tion. The current structure of the cap-and-trade bill put forward struction could represent at most a quarter of by U.S. representatives Henry Waxman and Edward Markey, as the voluntary market volume in 2010 (assuming well as the Kerry-Boxer bill passed by the Senate Committee on a recovery and destruction rate of 10%, which Environment and Public Works, indicates a potential maximum is likely optimistic for many A5 and even non-A5 allowance of 2 billion tCO2e per year from offsets. Credits from ODS destruction projects could potentially be well placed to countries, at least in the short term). Although help meet this requirement, although they would represent a recovery rates could increase as knowledge small portion of overall offsets—with 10% of ODS recovered and and capacity grows, even with increasing re- destroyed globally, this amount would account for 2% of the 2 covery rates, expected growth in the voluntary billion tCO2e offset allowance in 2015. market and a decrease in the volume of reach- x Study on Financing the Destruction of Unwanted ODS E X E C U T I V E S U M M A RY able banks means that ODS destruction projects Protocol in phasing out the consumption and will be a small percentage of the market in later production of ODS to cover the missing part— years. emissions—and, as such, ensures that the full life- cycle of ODS is addressed from initial production ODS destruction proj- to end-of-life recovery and disposal. Highlight- ects are considered unlikely to overwhelm the ing these advantages will be important for cre- voluntary market. Figure ES-1 below compares ating a good reputation and demand for ODS the ODS potentially available for destruction destruction projects in the voluntary market. with the projected volume of the voluntary It is also possible that in the early years of an market. ODS destruction program, some investors might be shy to venture into a new project type or - ect developer or an investor. Figure ES-1 Comparing ODS Potentially Available and Eligible for Destruction (Bars) with the Projected Volume of the Voluntary Market (Diamonds), in Millions of institution (IFI), could play an important role Tonnes of Carbon Dioxide Equivalent in ensuring that such projects do initially get developed. Once the viability, reliability, and ODS Potentially Available for Destruction (Bars) and Projected Volume of the Voluntary Market (Diamonds), in Million tCO2e 500 50% Destruction 476 been proven, IFIs would likely withdraw from 450 10% Destruction 400 1% Destruction sector. 350 347 300 250 Towards a Global Program for ODS 200 180 Destruction: How Can We Capitalize 150 on the Existing Montreal Protocol 100 Infrastructure? 50 0 2010 2015 2020 Capitalizing on the existing Montreal Protocol infra- Projected volume of voluntary market structure can provide additional value and credibil- ODS potentially available for destruction ity for ODS destruction projects. Many of the roles and responsibilities already in place can be assem- Hamilton et bled in the form of a global program for facilitating al. (2009). 2010 estimated by sight from Figure 35 of this re- port. the ODS destruction process. Member States, nor HCFCs. Ozone Secretariat – In a global program for - ber of offsets demanded/supplied. Because an offset can ODS destruction, the Montreal Protocol Parties be traded several times before retirement, the market vol- may wish to consider expanding the role of the ume usually exceeds the number of actually existing offsets. Ozone Secretariat in two important ways. First, the Ozone Secretariat could offer a clearing- house-type function for connecting owners of It will also be important to clearly differentiate ODS banks with project developers and inves- ODS destruction projects from past industrial tors by building on its current responsibilities for gas projects, such as the destruction of HFC-23, managing the Parties’ data reporting under which have encountered criticism in the carbon Article 7 of the Montreal Protocol. Second, the markets. ODS destruction has a compelling sto- Ozone Secretariat could play a role in man- ry: it extends the prior success of the Montreal aging a registry for tracking ODS imports and FINAL REPORT xi E X E C U T I V E S U M M A RY exports for destruction and complementing the ODS recovery procedures, in order to create - the enabling environment in A5 countries to en for individual projects, thereby improving the manage ODS, which would in turn facilitate credibility of the assets. participation in ODS disposal projects. In addi- Country Governments – As owners of unwanted - ODS, governments would need to pursue ODS ties should explore options for providing upfront destruction projects either on their own or by contracting a private company. In a different catalyze the market and, to the extent possible, role, as facilitators, governments could take on mainstream ODS disposal in waste manage- a number of activities. First, governments could ment investment projects. collect data from the private sector on exist- Technical Bodies – TEAP is already playing an ing ODS banks as an input to the clearinghouse important role in developing the opportunity managed by the Ozone Secretariat. Second, - governments could track the movement of ODS untary market. For example, VCS’ extension of across their borders—imports and exports—for scope refers to the report of the TEAP Task Force the express purpose of destruction, and report on Destruction Technologies as the source for this information to the Ozone Secretariat. Third, screening criteria for destruction technologies governments could impose a tax on the sale and requirements for the destruction and re- earned through ODS destruction projects, the analysis and expert input developed by the revenue from which could be put in a separate TEAP, third-party standards and methodologies can help ensure that robust and real emission less cost-effective projects or for ODS manage- reductions are achieved through the destruc- ment more generally.2 The tax rate could also be tion of ODS. differentiated depending on the type and size of the project being undertaken; for example, for more cost-effective projects such as those What Challenges and Gaps Might Be destroying existing stockpiles or recovering re- Faced Through Reliance on the Voluntary frigerant from industrial equipment, a higher tax Carbon Market? could be assessed. Finally, governments have an important role to play in removing or mini- A number of challenges must be overcome in order mizing regulatory, logistical, or technical bar- for the voluntary market to become part of a viable source. Regulatory impediments to exporting ODS banks. ODS for destruction or a lack of infrastructure for recovery and collection of ODS will challenge Perverse incentives and unintended conse- the success of any strategy for promoting ODS quences destruction. that could be generated through destroying Multilateral Fund and Implementing Agencies – ODS for carbon credit suggests that perverse in- The Multilateral Fund (MLF) and the Agencies could also play an important role in helping for the purpose of earning destruction cred- countries to overcome barriers to ODS destruc- its. These might include illegal production of tion, such as helping to build infrastructure for phased out ODS, such as CFCs, or export from ODS recovery or training technicians in proper one country with legislation that requires de- 2 earned from the destruction of HFC-23 (a byproduct of HCFC-22 production), which was then put into a government fund for other sustainable development activities. xii Study on Financing the Destruction of Unwanted ODS E X E C U T I V E S U M M A RY struction to another that does not, false report- Exhibit ES–3 Strategies to Minimize Costs and Maximize Revenues ing of quantities, mislabeling of ODS, and other activities to promote the generation of carbon Combine ODS destruction projects with other activities or programs that are also eligible for crediting in the carbon credits. Countermeasures to most of these per- verse incentives can be put in place through the credits. This strategy could also be highly effective to fund third-party voluntary market standards, meth- ongoing collection programs, such as municipal, utility, or odologies, and registries. Such mechanisms retailer programs to collect refrigerators upon disposal, and ensure that the ODS refrigerant and foam blowing agent are already developed or currently under devel- destroyed. opment are relatively successful at addressing Mainstream ODS destruction projects into larger programs and these concerns. development projects, such as a comprehensive waste man- agement program. Group or pool projects together to minimize transaction costs destruction projects – Some ODS destruction and achieve economies of scale. projects will be more cost-effective than others. transaction costs associated with participat- ing in the voluntary market—including project limited and represents a gap that must be ad- - dressed through other means. cation—larger volume projects achieve some Countries with low volumes of ODS – As men- economies of scale and are therefore more tioned above, some A5 countries, such as cost-effective. Certain project activities are also low-volume consuming countries, may have more costly to implement, such as collecting volumes of ODS that are not cost-effective to household refrigerators from a sparsely populat- - ed area. This report has found that the carbon cial incentive of the voluntary carbon market. credit prices required to make some project This situation would need to be reviewed on a case-by-case basis, but represents a possible price of over $40/tCO2e would be required for gap for what the voluntary market can offer. a project that only collected 1,000 refrigerators. – The consequence is that some projects may Some A5 countries may not have the base car- - tional assistance. in the voluntary carbon market, especially in the early years of such a program. A number One possible solution would be for governments of institutions, such as the World Bank Institute’s to assess a tax on the sale of VERs generated by Carbon Finance Assist program or UNEP Risoe, ODS destruction projects, as discussed above. capacity in developing countries. Possible so- projects; some strategies to accomplish this are described in Exhibit ES-3. strong and concerted effort to address this po- ODS not covered by the voluntary market – The tential gap, some countries could fall through goals of the greenhouse gas (GHG) market the cracks. may not always serve to optimize ozone ben- Restrictions on export/import of ODS for destruc- tion, and accessing ODS destruction capabilities – destruction of halons is allowed under CCX, ha- Existing policy frameworks in some A5 and non- lons will not be (at least initially) included under A5 countries may not allow, or facilitate, the ex- the ODS destruction programs of the Reserve or port and import of ODS for destruction. This is a VCS. As it appears that halons will not be widely critical challenge to address when considering covered by standards in the voluntary market, - the opportunity for halon destruction may be nance ODS destruction. FINAL REPORT xiii E X E C U T I V E S U M M A RY These challenges and gaps are important to under- be that the voluntary market cannot serve as the stand in designing an overall strategy for ensuring the recovery and destruction of unwanted ODS, es- pecially since some of these gaps may require oth- ODS destruction could be a highly successful and er approaches—beyond reliance on the voluntary cost-effective approach in many cases, and cer- market—to fully address ODS bank management tain strategies—as described in this report—can be in an environmentally sound manner. Given these pursued for improving the opportunity for all Parties challenges and gaps, a natural conclusion might to the Montreal Protocol. xiv Study on Financing the Destruction of Unwanted ODS CHAPTER 1 Introduction At its 54th Meeting, the Multilateral Fund Executive Chapter 4 gives an overview of the carbon mar- Committee endorsed a proposal in the World Bank’s ket, going into particular detail on the voluntary 2008–2010 Business Plan to conduct a study on ODS carbon markets. destruction. It was agreed that the study would Chapter 5 describes how ODS destruction could make use of the voluntary carbon market and the destruction of unwanted ODS through the vol- progress already underway to allow such proj- untary carbon market while also 1) reviewing exist- ects to access that market, compares the vol- untary market third-party standards that are ODS disposal and/or developing a methodology for considering ODS destruction projects, and pro- recommendation to the Executive Committee and vides a step-by-step guide for how to develop an ODS destruction project in the voluntary market. - Chapter 6 estimates the amount of ODS that - could potentially be destroyed for credit in the developed voluntary market, and compares that quantity in collaboration with Executive Committee mem- to the projected volume of the voluntary car- bers, the Multilateral Fund Implementing Agencies bon market. and the World Bank (provided in Appendix B to this Chapter 7 discusses other elements that affect report). - tion through the carbon market, including sup- This study responds to those Terms of Reference, and ply and demand dynamics and the cost of ODS is organized as follows: destruction. Chapter 8 describes potential sources of ODS Chapter 2 provides background and context for destruction projects, and provides a com- for this study and generally responds to the parative analysis of existing methodologies for question: why is funding needed for ODS de- ODS destruction. struction? - ODS destruction through the voluntary market, ing the destruction of ODS, including the Mul- along with potential solutions. tilateral Fund (MLF), other multilateral funding agencies, and the voluntary carbon market. and proposes strategies for pursuing ODS de- struction through the voluntary market. FINAL REPORT 1 INTRODUCTION Appendix A presents case studies on ODS de- ODS that could be destroyed for credit in the struction efforts to-date. voluntary market, as described in Chapter 6. Appendix B includes the approved Terms of Ref- Appendix D provides a sample of applicable erence for this study. templates for developing ODS destruction proj- Appendix C gives a detailed accounting of the ects. methodology used to estimate the amount of 2 Study on Financing the Destruction of Unwanted ODS CHAPTER 2 Background: Why Is Funding Needed for ODS Destruction? 2.1 Why Destroy ODS? Exhibit 1 ODPs and GWPs of Common ODS GWP Gas ODP (100 year) Protocol on Substances that Deplete the Ozone Layer has achieved remarkable success in reduc- CFC-11 1.0 4,750 ing the production and consumption of ozone de- CFC-12 1.0 10,900 pleting substances (ODS) by over 97% from historic CFC-13 1.0 14,400 baseline levels (UNEP 2009). This success can be at- tributed to the strict mandates put in place for the CFC-113 0.8 6,130 phaseout of ODS production and consumption. CFC-114 1.0 10,000 CFC-115 0.6 7,370 Today, however, a large amount of ODS still remains in equipment and products such as refrigerators Halon-1301 10.0 7,140 and air conditioners (as refrigerant and foam blow- Halon-1211 3.0 1,890 - Carbon tetrachloride 1.1 1,400 tinguishers, as well as in stockpiles held by countries Methyl bromide 0.6 5 and industrial and commercial users. Together these sources are referred to as ODS banks (MLF 2008). HCFC-22 0.055 1,810 Because emissions from ODS banks are not (explic- HCFC-123 0.02 77 itly) controlled by the Montreal Protocol, there is a HCFC-124 0.022 609 risk that these ODS could be released to the atmo- sphere if legislation or other incentives are not put in HCFC-141b 0.11 725 place. ODS banks must be recovered and properly HCFC-142b 0.065 2,310 treated, otherwise the ODS will be released to the IPCC (2007); ODPs: UNEP (2006a) atmosphere over time through slow leakage, cat- astrophic leaks, and unintentional (or intentional) venting. 3 ODS are usually “unwanted� for re-use because they are non-reusable or surplus. FINAL REPORT 3 BACKGROUND: WHY IS FUNDING NEEDED FOR ODS DESTRUCTION? Because of their high GWPs, destroying unwanted (ExCom) of the Multilateral Fund (MLF) to consider ODS3 commencing pilot projects related to the destruc- emissions. IPCC/TEAP (2005) found that approxi- tion of ODS; requesting the TEAP to conduct a cost- mately a third of the ODS banks existing in 2002 would be vented by 2015 unless action was taken, the Ozone Secretariat to consult with experts from resulting in emissions of nearly 7 billion metric tonnes other funding mechanisms on possible funding op- (MT) of carbon dioxide equivalent (tCO2e). Destroy- portunities for managing and destroying ODS banks; ing that ODS instead would result in a substantial and requesting the Ozone Secretariat to convene a emission reduction, equivalent to approximately workshop prior to the Open-Ended Working Group one seventh of global anthropogenic GHG emis- in Geneva in July 2009 to further consider the chal- sions in 2004 (IPCC 2007). Of course, destroying the lenge of ODS banks. As previously mentioned, this ODS also has an important positive impact on the study is also an input to an ongoing discussion of ozone layer; the 2005 supplemental report from the how to manage ODS banks, and was commissioned Montreal Protocol’s Technology and Economic As- by the ExCom in Decision 55/34. sessment Panel (TEAP) estimates that the destruc- tion of ODS could accelerate the recovery of the ozone layer by up to two years, which could result in 2.2 Constraints on the Recovery and - Destruction of ODS: The Need for cer mortalities and morbidities (TEAP 2005). Funding As noted, the magnitude of this ODS bank chal- While there is a substantial volume of ODS banks lenge is considerable. A report by TEAP estimated that needs to be recovered and properly treated, worldwide ODS banks at approximately 3.78 million a number of barriers stand in the way. To under- ODP-weighted tonnes in 2002, which is more than 55 times the global consumption of ODS in 2007, and to understand the general process for disposing of equates to over 20 billion tCO2e (UNEP 2009). Of unwanted ODS. these banks, about 1 million tonnes are believed to be available for recovery and destruction, although 2.2.1 The Process of ODS Destruction: From Recovery to Destruction for recovery/collection (TEAP 2002). Additionally, This process of disposing ODS can vary depending collecting and destroying ODS is a time-sensitive ex- on the source of ODS, the country in which recovery ercise since ODS leak from equipment and storage and destruction occurs, and other factors, but gen- containers at varying rates. While some ODS banks erally follows the steps described below. A graphic may remain until 2050 based on expected product depiction of these steps is also provided in Figure 1. lifecycles (e.g., foam applications with longer life- times), if not properly recovered and destroyed, collection of ODS from the ob- banks may be emitted well before then (TEAP solete appliances, commercial or industrial equip- 2009a). ment, or stockpiles in which it is contained. For refrigeration/AC units undergoing servicing, a cer- Recognizing the importance of managing these ODS banks in an environmentally sound manner, the equipment to remove the refrigerant and store it Parties to the Montreal Protocol took Decision XX/7. in a recovery cylinder.4 This typically occurs on-site. This decision outlined preliminary actions to better The removal of refrigerant from commercial/indus- understand and address the issue of ODS banks, trial equipment at end-of-life similarly occurs on site, including: requesting the Executive Committee - 4 Note that recovery cylinders are different than the cylinders in which material is contained at time of purchase. 4 Study on Financing the Destruction of Unwanted ODS BACKGROUND: WHY IS FUNDING NEEDED FOR ODS DESTRUCTION? consolidated into larger cylinders or storage tanks. Figure 1 The ODS Destruction Process The size of the storage tank used depends on the source of the ODS, with small cylinders typically used for recovered refrigerant and pressure vessels Collection often used for industrial stocks. The ODS are stored aggregated. This consolidation step may in fact oc- cur at several levels. For example, a local ODS ser- C Consolidation vice company may consolidate its stocks and send and Storage them to a regional consolidator, so that an even larger shipment can be sent for destruction. It is also important to note that at this step, destruction is not the only choice; some ODS consolidators will send Transport some of their stocks for reclamation and eventual resale. For those ODS intended for destruction, the next step Testing is transportation. ODS are transported to a destruc- tion facility by truck, rail, or ship as needed. A variety of container types are used for ODS transport, rang- ing in size from 30 lbs to 200,000 lbs (MLF 2008). Some Destruction smaller containers may be transported as-is, without transfer of their contents into transport vessels. ODS may be transported several times before its ultimate destruction, often as it moves through the consoli- dation process. lete household appliances, units are collected and taken to a demanufacturing facility where a techni- Upon arrival at the destruction facility, the ODS may cian drains the refrigerant; alternatively, the refriger- be pumped into a holding tank or can be destroyed ant is sometimes evacuated before transportation. directly from the container it arrives in. Before the Refrigerator cabinets may be shredded whole and material is destroyed, testing of the container con- steam-treated in an airtight chamber in order to re- tents is undertaken to verify exactly what materials cover ODS blowing agents in the foam or the foam are being destroyed, often through gas chroma- may be removed and treated separately. Larger in- tography. ODS material is also tested prior to being dustrial ODS stocks held in facilities and warehouses sent to the destruction facility (e.g., at the original are also collected. These stocks are often stored in source), and comparing these records serves as a tanks, and recovery consists of either tank pick-up or transfer from tank to tank. Finally, destruction of the ODS is undertaken. De- The next step is often consolidation and storage. struction facilities use any one of several types of Because ODS might be collected from a large technologies to incinerate the ODS, typically de- number of smaller units (such as household refrig- erators or small cylinders), it needs to be combined TEAP has issued a list of destruction technologies before sending it for destruction; this step avoids approved for destruction of concentrated sourc- the shipping of many smaller containers, which can es (largely refrigerant) and for dilute sources (i.e., lead to additional expense, possible damage and foams containing ODS). These include cement kilns, leakage, and other obstacles. The collected ODS argon and nitrogen plasma arc, rotary kiln incinera- are typically brought to a central facility, where it is tors, liquid injection incineration, and gaseous/fume FINAL REPORT 5 BACKGROUND: WHY IS FUNDING NEEDED FOR ODS DESTRUCTION? oxidation. The full list of approved technologies was ever—and the main barrier with which this report updated at the Fifteenth Meeting of the Parties is concerned—is the funding constraints that both through Decision XV/9 (UNEP 2003). A5 and non-A5 Parties face for the destruction of ODS. In fact, a recent study for the MLF found that 2.2.2 Key Barriers to Destruction costs associated with unwanted ODS recovery and There are many barriers to effective recovery and reclamation or destruction is the primary obstacle end-of-life management of ODS, especially for Ar- in achieving improved ODS management in A5 ticle 5(1) (A5) countries, as illustrated in Exhibit 2. Parties (MLF 2008). The TEAP has estimated that the The market for reclamation and recycling of ODS costs to manage all easily accessible banks (“low - effort�) could reach US$62 billion, while adding less tors, which can detract from the amount of ODS accessible banks (“medium effort�) would escalate destroyed. One of the most important barriers, how- that total cost to nearly US$180 billion.5 While these costs would likely be borne over several decades, they are still sizeable. Exhibit 2 Other Barriers to ODS Destruction Apart from cost issues, there a number of other obstacles to ODS To widely facilitate ODS destruction, A5 Parties will re- destruction that are complex and wide-ranging: storage, and destruction, as well as for technology Most countries lack regulatory frameworks to promote ODS de- struction. transfer and cooperation. While the MLF has pro- A wide geographic distribution of ODS banks, versus the cen- vided assistance to A5 countries over the past two tralized destruction facilities they must be sent to, presents a decades to fund the phaseout of ODS consumption and production, its mandate is limited with respect Proper disposal of ODS also requires that persons dealing with the ODS be trained in the technical means to prevent their re- to ODS banks. To date, the Parties have agreed to lease. fund only pilot projects related to the environmen- Countries undertaking ODS destruction also need the proper tally sound management of ODS banks. In addition, tools and access to the infrastructure to collect, transport, while non-A5 Parties are thought to be more capa- store, and destroy the ODS. The process for developing this in- ble of encouraging ODS destruction or raising funds A5 countries. to do so through government mandated rebates, For countries without domestic destruction facilities, shipping taxes, or producer responsibility programs, these ODS to another country for destruction may be the best option. types of programs lead to costs for holders of obso- However, the logistical and legal complexities of shipment may present a barrier to some countries. Finally, several international conventions regulate the interna- encourage ODS destruction would likely lead to in- tional shipment of ODS, including the Basel Convention, Cen- creased levels of destruction (MLF 2008). tral American Agreement, and Waigani Convention. The legal and administrative requirements of navigating these agree- ments may prove to be a barrier for some projects. Potential options for funding ODS destruction are discussed in the next section, including the possibility : MLF (2008). 5 Examples of types of banks requiring low and medium effort to recover are given in TEAP (2009). 6 Study on Financing the Destruction of Unwanted ODS CHAPTER 3 Possible Options for Financing ODS Destruction As part of their Decision XX/7, the Parties to the process for project development and implementa- Protocol asked the Ozone Secretariat to identify tion which is familiar to A5 countries and Implement- funding opportunities for the management and de- struction of ODS banks through consultation with the of a full mandate for ODS destruction and limited MLF Secretariat and other multilateral and bilateral available funding. organizations and funding mechanisms. The results of that inquiry were presented at a workshop prior At its 58th Meeting, the ExCom approved a set of to the OEWG in Geneva in July 2009 and are incor- interim guidelines for the funding of demonstration porated into the discussion here (UNEP 2009). At the projects for the disposal of ODS (Decision 58/19). end of this section, a more detailed introduction to According to these guidelines, the MLF will fund a the voluntary carbon market as a potential funding limited number of demonstration projects that cov- mechanism is provided. er aspects not yet covered by other demonstration projects, at a maximum level of US$13.2/kg of ODS to be destroyed (to be adjusted as appropriate 3.1 Multilateral Fund considering the project scope). Funding is intended to cover transport, storage, and destruction, and will To assist developing countries that might not other- not be available for collection of ODS except as it - relates to monitoring of the sources of ODS. Funding essary to phase out ODS, the MLF provides funding is also envisioned for a maximum of one destruction to cover the incremental costs incurred by A5 Par- project each for disposal of halon and for carbon ties to enable their compliance with ODS consump- tetrachloride. As of January 2010, the MLF has ap- tion and production phaseout obligations. These proved project preparation funding for nearly a funds are provided through contributions from non- dozen projects addressing different aspects of ODS A5 Parties. disposal in Algeria, Brazil, China, Colombia, Cuba, Ghana, Indonesia, Mexico, Nepal, Philippines, Tur- To date, the ExCom has decided to provide limited funding for select ODS disposal pilot projects in re- In addition, the MLF has requested that UNIDO sub- sponse to Decision XX/7 of the Parties. One key ad- mit two additional project preparation requests for vantage of funding ODS disposal through the MLF ODS disposal pilot projects, one for Africa and one is the already-established institutional structure and for West Asia as part of their business plan for 2010. FINAL REPORT 7 POSSIBLE OPTIONS FOR FINANCING ODS DESTRUCTION Another option for funding ODS disposal under the its climate change focal area that have phased MLF is the creation of a special facility for funding cli- out ODS in household refrigerators, and potential might exist to augment these projects to include an ExCom meetings. The funds from the repayment of ODS destruction component. Moreover, the GEF’s a US$1.2 million concessional loan project are being persistent organic pollutant projects focus on the considered as starting income that could be used phaseout and disposal of persistent organic pollut- to create such a facility (UNEP 2009). Discussions on ants and waste, as well as the establishment of in- a special facility have been ongoing at the level of frastructure for collection, storage, and disposal of the ExCom and more recently brought to the level persistent organic pollutant waste. One project has of the Parties in 2009. The Parties requested through already included an investigation of ODS disposal Decision XXI/2 that the facility be considered as an (UNEP 2009). agenda item at the 30th Meeting of the Open-end- ed Working Group in 2010. - including the World Bank or the regional develop- 3.2 Other Multilateral Organizations and ment banks like the Asian Development Bank, the Funding Mechanisms African Development Bank, or the Inter-American Development Bank. For example, ODS destruc- Apart from the MLF, there are several other oppor- tion could be mainstreamed into other related en- tunities to fund ODS destruction through multilateral vironmental programs, such as hazardous waste and global lending organizations. In most cases, management, and receive funding through those opportunities exist to integrate ODS destruction into programs. Alternatively, dedicated trust funds or existing programs where there is potential overlap carbon funds could be accessed to provide upfront of themes. The feasibility of these, and any other - possible opportunities would have to be carefully tion projects or ODS destruction components pig- considered before selecting one or another option gybacking on other carbon market projects (such to pursue, along with possibilities for packaging and which would be paid back at an agreed rate af- costs of ODS destruction. ter credits were issued. Such an arrangement could The Global Environment Facility (GEF)—which acts the risk of both parties. as a sort of equivalent to the MLF for other inter- national environmental treaties, such as the Unit- ed Nations Framework Convention on Climate 3.3 Other Schemes for Financing ODS Change and the Stockholm Convention—rep- Destruction resents one such opportunity for accessing ad- ditional funding for ODS destruction. The GEF has - authority to grant funds under its ozone, climate tilateral organizations, a number of other schemes change, and persistent organic pollutants focal to promote and cover the costs of ODS destruc- area programs to activities related to ozone and tion at the local or national level have been iden- climate change protection. The GEF’s ozone focal area is authorized to fund activities and countries and government-mandated programs that create not covered by the MLF, but which are consistent - with the Montreal Protocol’s objectives. In addition, incentives). ODS destruction could potentially be funded under the GEF’s climate change program, focusing on One option is producer responsibilities schemes, the high-GWP value of the gases being destroyed. which rely on levies or licensing fees (usually on the To date, the GEF has funded a few projects under production/import of ODS-containing equipment), 8 Study on Financing the Destruction of Unwanted ODS POSSIBLE OPTIONS FOR FINANCING ODS DESTRUCTION and rebates (for the return of recovered ODS), to price of US$4.60/tCO2e (the average price of a encourage producers to safely manage the entire voluntary carbon credit for an industrial gas proj- lifecycle of ODS-containing equipment. Producer ect in 2008), the destruction of 1 tonne of CFC-12 responsibility schemes are thought to work best in could generate US$50,140 (Hamilton 2009). countries with strong public support and/or govern- This is substantially higher than the cost of destruc- ment support, and in situations where few players tion estimated by TEAP (2005) at about US$5/kg (or are involved (i.e., limited to producers/importers) US$5,000/tonne) (not including other project costs (MLF 2008). such as collection, transportation, and storage) and also higher than the maximum level of fund- Fees and taxes can also be assessed outside of a ing agreed by the MLF in its interim guidance on producer responsibility scheme to generate reve- approving ODS disposal projects of US$13.2/kg (or nue to fund ODS collection, recycling, and disposal. US$13,200/tonne). The MLF maximum funding level For example, disposal fees can be added to the translates into approximately US$1.21/tCO2e, us- cost of new appliances containing ODS, which also ing the GWP of CFC-12. Thus, the revenue gained through the carbon market could go a long way encouraging consumers to purchase non-ODS con- towards covering the total costs of destruction, in- taining equipment. Taxes can also be imposed, for cluding collection, storage, and transportation. It is instance on the production of new equipment con- also important to note that more easily accessible taining ODS. Among the countries that have taxed banks (e.g., CFC refrigerant stockpiles or installed ODS are Australia, Belarus, Bulgaria, the Czech banks in large systems or from appliances in dense- Republic, Denmark, Hungary, Republic of (South) Korea, Poland, the Seychelles, Singapore, South but less accessible banks (e.g., CFC foams or small Africa, Sweden, Thailand, Vietnam and the United systems in low volume consuming countries) can States (TEAP 2003). - Another possibility is leveraging the interest of pro- cessible banks could be used to fund less acces- ducers of ODS substitutes as a means of funding sible ones or to create better storage facilities fund ODS destruction. In Italy, for example, a producer - of halon alternatives offered to collect and destroy nologies and/or other environmental protection halons from users who committed to using the al- activities. This concept is discussed at more length in Chapter 9. - Because ODS are not included in the Kyoto Protocol tinguishers (UNEP 2009). basket of greenhouse gases, ODS destruction proj- ects are not currently eligible under the Kyoto Proto- col’s carbon market trading mechanisms, including 3.4 The Voluntary Carbon Market the Clean Development Mechanism (CDM) and Joint Implementation (JI). While the Parties to the The carbon market represents another potential Kyoto Protocol have the power to interpret the Pro- avenue for funding ODS disposal, and the one that is the primary focus of this report. The high global for example, to include ODS destruction under the warming potential (GWP) of ODS means that their CDM—there is no indication that Parties are moving in that direction (UNEP 2009). volumes of carbon credits, which can then be sold in the carbon market. For example, destroy- With ODS destruction ineligible for CDM, the - ing 1 tonne of CFC-12 with a GWP of 10,900 could carbon market has instead been pinpointed yield up to 10,900 credits (one credit is equal to as a funding source for global ODS destruction due one tonne of CO2 equivalent) (IPCC 2007). At a FINAL REPORT 9 POSSIBLE OPTIONS FOR FINANCING ODS DESTRUCTION acceptance of emission reduction activities. The tion on understanding the carbon market is provid- voluntary market operates outside of compliance ed in the next chapter, and then a more detailed markets and allows organizations to offset carbon explanation of how the voluntary carbon market sys- emissions on a voluntary basis. Background informa- tem could be applied for ODS follows in Chapter 5. 10 Study on Financing the Destruction of Unwanted ODS CHAPTER 4 Understanding the Carbon Market The global carbon market can be broadly divided bon market, it has demonstrated strong growth in into two key segments—the compliance market recent years and doubled between 2007 and 2008 and the voluntary market—as depicted in Figure as it grew from US$335 million in 2007 to US$704.8 mil- 2. In 2008, the global carbon market represented a lion in 2008 (World Bank 2009). The compliance and total traded value of US$126 billion, of which the vol- voluntary markets are described in more detail in untary market represented less than 1% (World Bank Sections 4.1 and 4.2, respectively. 2009). While the value of the voluntary market rep- resented a very small portion of the total global car- The market can also be segmented into allowance markets and project-based markets. Allowance markets are based around a restricted number of tradable carbon credits that are given away or sold Figure 2 Structure of the Carbon Market to participants by governments or international bod- ies. Project-based markets rely on individual projects Kyoto Protocol National or Regional that result in a decrease in emissions and therefore Flexible Mechanisms Compliance Markets (e.g., CDM) (e.g. EU ETS) generate An example of a project based market is the CDM. Most emis- sion reduction activities in the voluntary market are Compliance Market project-based. The allowance and project-based markets do often interact and the credits within each are, to some extent and with some limitations, interchangeable. For example, operators can use CARBON a certain amount of CDM credits for compliance MARKET under the EU Emission Trading Scheme (EU ETS). The - er than project-based elements of the compliance Voluntary Market market, as shown in Figure 3. 4.1 Compliance Markets Over-the- Chicago Climate Counter Market Exchange Compliance markets for GHGs exist both at an inter- national level, between governments with binding FINAL REPORT 11 UNDERSTANDING THE CARBON MARKET Protocol—represents one tonne of CO2 equivalent. Figure 3 Volume Comparison of the Project-based Compliance and Voluntary Markets As noted above, the Kyoto Protocol limits trading to non-Montreal Protocol GHGs; ODS are therefore 700 currently not eligible for projects under the CDM. annual volume of project-based transactions 600 Annex I countries to the Kyoto Protocol have binding 500 400 Amount Units� (AAUs), to limit GHG emissions.6 The (MtCO2e) - 300 nisms, emissions trading, allows AAUs to be traded 200 between countries. Such trades currently represent a very small proportion of the total global carbon 100 market. 0 1998 2000 2002 2004 2006 2008 Voluntary Other compliance JI CDM World Bank (2009). generated by projects that reduce emissions in non- this chart excludes secondary CERs, as well as CCX Annex I countries.7 The sale of these credits to buyers (which is not classed as a “project-based� system). in Annex I countries (such as national governments with binding emission targets under the Kyoto Pro- targets under the Kyoto Protocol, and at national tocol) generates revenue that makes the project and regional levels through legally-binding policy instruments introduced in order to tackle climate the CDM can also be used to help organizations change and/or to help national governments meet targets under regional systems, such as the EU achieve their Kyoto Protocol targets. ETS described below., Given this additional source of demand for CERs and the fact that a strong The key aspect of compliance markets is that there secondary market for CERs exists, the CDM is the is a legal requirement for those bodies covered to second largest component of the global carbon demonstrate that they hold carbon credits equiva- market on a pure volume basis (i.e. tCO2e transact- lent to the amount of GHGs that they have emitted. - - ket (i.e., third-party CER transactions) accounted for tems are used to ensure that this process is robust 20% of the value of all carbon market transactions and transparent and penalties can be applied to in 2008 (US$26 billion) with the primary CDM market participants that do not comply. (i.e., CER purchases directly from the CDM project) forming a further 5% (US$6.5 billion). 4.1.1 The Kyoto Protocol and its Flexible Mechanisms - A key component of the global carbon market is ties to generate emission reduction units (ERUs) by formed through the Kyoto Protocol and its three investing in emission reduction projects in an Annex I country. Again, these credits can then be sold to JI. Six main GHGs (CO2, CH4, N2O, HFCs, PFCs and an Annex I country or entity to help meet its Kyoto SF6) are covered by the Kyoto Protocol and each Protocol commitments. Since 2008, ERUs have been carbon credit—of the various types created by the eligible for limited use under the EU ETS. 6 As noted above, each AAU is equivalent to one tonne of CO2. 7 Developing countries, without binding emission targets are referred to as Non-Annex I countries to the Kyoto Protocol and are broadly equivalent to Article 5 countries of the Montreal Protocol. Developed countries, with emission reduction targets are referred to as Annex I countries under the Kyoto Protocol. Such countries are broadly equivalent to non Article 5 countries (Article 2) countries under the Montreal Protocol. 12 Study on Financing the Destruction of Unwanted ODS UNDERSTANDING THE CARBON MARKET 4.1.2 National or regional compliance gaining recognition from their employees, markets shareholders and customers. A number of national or regional compliance mar- Experience—Although certain sectors face either kets have now been established or are under devel- no mandatory carbon constraint or only partial opment. The largest of these—with a traded value of constraints, organizations may elect to enter the almost US$92 billion in 2008—is the European Union voluntary market to reduce net emissions and Emission Trading Scheme (EU ETS) (World Bank 2009). gain market experience in anticipation of pos- Under the EU ETS, mandatory emissions limits are set sible future regulation (e.g., pre-compliance). for energy intensive organizations covered by the Principle—Organizations and consumers may scheme, and EU Allowances (EUAs) can be traded have adopted a formal or informal environ- between participants. mental ethos and choose to offset emissions on principle. The Regional Greenhouse Gas Initiative (RGGI) in Competitiveness—Companies seek to differen- the United States is an example of a sub-national tiate their products by offering carbon offsets to compliance market established through the intro- customers bundled with their products. duction of a mandatory emission trading scheme covering electricity generators in ten U.S. states. It The remainder of this section describes the differ- ent aspects of the voluntary market, including the traded volume in 2008 of US$246 million. While CERs non-binding and binding sections of the market, the from the CDM are not eligible as offsets under RGGI, structure of the market, and the project cycle. other types of project-based offset credits, repre- senting emission reductions in the U.S. outside the 4.2.1 Non-binding (Over-the-Counter) versus power sector, can be used. Binding (Chicago Climate Exchange) The voluntary market can be split into two main sec- tions. Under the larger, non-binding, section of the 4.2 Voluntary Markets market, buyers may establish targets to reduce emis- sions, but they face no legal requirement to meet The voluntary market operates outside the compli- those targets. This section of the market, known as ance market, where organizations can offset car- the over-the-counter (OTC) market, is comprised of bon emissions on a voluntary basis. In contrast to the project-based emission reduction (offset) activities compliance market, demand in the voluntary mar- ket is driven not by regulation but by buyers’ interest third-party standards. Such standards include the in mitigating and offsetting their emissions. Voluntary Carbon Standard (VCS), the Climate Ac- tion Reserve (the Reserve), and the Gold Standard Motivations for participating in the voluntary market (see Exhibit 3).8 Voluntary project offset credits are are varied, but the primary drivers include the fol- known as VERs (voluntary emission reductions or lowing (ICF 2008): accounted for 54 million tCO2e, (about 12% of the Reputation—As public concern over climate total value of project-based transactions in 2008) up change has increased, companies and govern- from 43 million tCO2e (6.7%) in 2007. ments have become more interested in gain- ing recognition for reducing their net carbon While the compliance market can be considered binding, in that participants are legally bound by 8 While there is no strict requirement to operate in accordance with a third-party standard in the voluntary market, de- mand from the end consumer is driving demand for projects developed in this way. FINAL REPORT 13 UNDERSTANDING THE CARBON MARKET Figure 4 Relative Size (Value) of the OTC and CCX Exhibit 3 Third-Party Standards Components of the Voluntary Market As a means of ensuring quality, legitimate, and consistent offsets in the voluntary market, a number of third-party standards—along 800 $705M 700 been established. Almost all credits earned in the voluntary mar- 600 500 currently exist, some are utilized more than others. Nearly half the 400 $335M Carbon Standard, followed by the Gold Standard with 12% and 300 the Climate Action Reserve with 10%. 200 $171M $99M 100 $43M Most standards focus on legitimizing carbon credit develop- $23M $37M $42M ment, but among them there are many differences in scope 0 pre-2002 2002 2003 2004 2005 2006 2007 2008 and approach. For instance, some standards only cover certain project types, such as the Gold Standard, which provides meth- Other Exchanges CCX OTC Hamilton . (2009) standards are only applicable for projects that follow CDM or JI project methodologies (but are not eligible for CDM/JI ac- creditation), like VER+. Others, like the Reserve, will only verify projects that are designed to their project methodologies, while Figure 5 Volume Growth in the Voluntary Carbon Market by outside parties for the VCS, as well as other standards’ meth- odologies, like CDM. CCX has produced a series of prescriptive 140 123Mt protocols but will also entertain project submissions using other 0.2 standards. 120 100 69 Hamilton et al. (2009). 80 66Mt MtCO2e 0.1 60 42Mt 23 40 25Mt 54 43 regulation to comply with a carbon constraint, ele- 20 42 10Mt 11Mt 11Mt 10 5Mt 2 1 ments of the voluntary market are also binding in 0 10 5 8 9 15 nature. Under voluntary schemes, such as the Chi- pre-2002 2002 2003 2004 2005 2006 2007 2008 cago Climate Exchange (CCX), participants make Other Exchanges CCX OTC legally binding voluntary commitments to comply Hamilton et al. (2009) with a carbon constraint. In 2008, CCX projects accounted for 69 million tCO2e, up from 23 million number of offsets demanded/supplied. The difference be- tween the two is that, depending on the turnover rate in the tCO2e in 2007 (Hamilton 2009). market, each offset originated can be traded several times usually exceeds the number of actually existing offsets Figures 4 and Figure 5 below demonstrate the rela- tive size of the OTC and CCX components (in terms of total traded value and volume) as well as the rapid growth in the voluntary market—especially by a description of how they interact and a visual CCX—over the past few years. depiction of those interactions. 4.2.2 Voluntary Market Structure The voluntary carbon market is comprised of partici- pants from both the supply and demand sides, as validity of the project’s emissions reductions. Project well as intermediaries. The roles of each these play- developers may then sell offsets through brokers to ers are described on the following page, followed 14 Study on Financing the Destruction of Unwanted ODS UNDERSTANDING THE CARBON MARKET Voluntary Carbon Market Structure Demand Supply On the demand side of the market, there are On the supply side of the market, there are three major four principal types of players: classes of players. Some may play more than one role: Companies Project developers oversee all aspects of identifying participate directly on exchanges, or and completing carbon offset projects. They seek out pay into offset schemes through project project opportunities, ensure projects are carried out to developers, aggregators, or brokers. Governments have similar options for buyers for the generated offsets directly in the retail participating in the offset market, though market or through brokers, exchanges, or aggregators. there may be additional requirements Aggregators pool carbon offsets across multiple projects regulating spending of public monies. to sell them on to retail or other secondary buyers. By NGOs have also taken an interest in the aggregating across projects, it is possible to reduce offset market, with a similar path to market as the risk of delivery through a more diverse portfolio. companies and governments. Aggregators include both companies and NGOs. Consumers generally cannot participate on Offset Wholesalers, similar to offset aggregators, pool exchanges or through brokers, but rely on a together carbon offset projects. However they sell packaged retail offset product supplied by a offsets not directly to retailers but to other companies, developer or aggregator. such as aggregators or carbon funds. Intermediaries A third group of market participants is formed by institutions that facilitate transactions between the demand and supply sides. Brokers serve as intermediaries in offset transactions, typically for business-to-business deals. Exchanges offer a platform for trading offsets in an open marketplace. Registries record carbon emissions or emission reductions in a central and standardized carbon registry. audit offset projects to verify that they have been completed, meet necessary standards, and have calculated the achieved emissions reductions correctly. Carbon Funds are vehicles that collect money from different investors to purchase carbon reductions or to invest equity or provide loans to emission reduction projects. Carbon funds can provide a return to their investors either in carbon offsets or in cash. They can be placed on the demand side of the market - when purchasing offsets from project developers - or on the supply side of the market - when carbon funds invest in the underlying projects and sell the offsets. Finally, carbon funds may act as mere intermediaries between investors and project developers. Most funds that provide returns in the form of emission reductions were set up as compliance vehicles and have targeted mostly CDM and JI projects Emission Reduction Procurement Tender) – the Dutch carbon fund). In contrast, carbon funds operating on the voluntary carbon market generally provide their investors with returns in cash rather than carbon reductions. To date, carbon funds have played a relatively limited role in the voluntary market with most voluntary buyers interacting directly with aggregators/brokers to purchase their offsets. Carbon funds that provide equity to projects are more likely to enter the voluntary carbon market than carbon funds which only sign off-take agreements. The former use the voluntary carbon market projects as a way to diversify mechanisms post 2012. Compliance funds have also used the voluntary market for pre-compliance credits. sell to aggregators directly or onto an exchange. other sophisticated buyers may choose to invest di- Companies and governments typically have the in- - stitutional capacity to trade on exchanges directly, able prices or exercise more control over the types of projects and their execution. Consumers are more or aggregations of projects. Financial institutions or likely to purchase more structured retail products FINAL REPORT 15 UNDERSTANDING THE CARBON MARKET Figure 6 Voluntary Carbon Market Structure Figure 7 Voluntary Market Project Cycle Verifiers Design of project methodology (if necessary) Financiers Project Developers Registries Approval of methodology by the selected standard (if necessary) Brokers Aggregators Exchanges Development of the project idea note, and then Consumers the project design document (if necessary) Companies Validation of the project by third party Governments NGOs Registration of the project with the selected standard and registry Adapted from ICF (2008). Monitoring of emission reductions from a project aggregator. Alhough aggregators will pursue different types of projects with different stan- Verification of emission reductions Issuance of credits fund. Figure 6 illustrates how these various players in- teract in the market. Developing a voluntary project involves a number of generic steps regardless of the specific standard 4.2.3 Voluntary Market Project Cycle bring pursued. Different stakeholders specific to the project cycle are: The development of a voluntary carbon market project generally follows a number of broad steps, Project Developer Verifier: third party in charge of assessing compli- as shown in Figure 7 below. The cycle below de- ance of the project with the rules of the standard scribes the general steps for a project that is de- pursued veloped in accordance with one of the existing Standard: the specific authority that officially registers the project and issues credits. third-party standards, such as VCS or the Reserve. Registry: a system for creating, tracking, trading Technically, there is no strict requirement to oper- and retiring carbon credits. ate in accordance with a third-party standard; Adapted from ICF (2008). however, end-consumer requirements are driving demand for projects developed under recognized third party standards. In 2008, 96% of transacted - ton 2009). the criteria for determining the eligibility and addi- tionality of the project under the methodology, the As such, the process starts with an evaluation of all calculation of the emission reductions, and the re- existing methodologies accepted by the third-party quirements for monitoring and recordkeeping. The standard being pursued that could be applicable concept of additionality is central to the project- to the project in question. To certify a project to a based market. Projects need to demonstrate that in a business-as-usual scenario (i.e., without the rev- must follow a methodology approved by that stan- enue stream associated with the sale of the credits 16 Study on Financing the Destruction of Unwanted ODS UNDERSTANDING THE CARBON MARKET either to the voluntary or compliance market) the If an existing methodology is appropriate for the project activity would not have taken place and project in question, then the development of a proj- the emission reductions would not have been real- ect design document can begin. However, if this is not the case, then either a revision to an existing third-parties, enables one tonne of CO2e saved to methodology can sometimes be sought, or a new “offset� the emission of another tonne of CO2e else- methodology must be developed and approved where. by a third-party standard. FINAL REPORT 17 CHAPTER 5 Accessing the Voluntary Market for ODS Destruction This chapter explains how access can be gained to limits eligible projects to those carried out in the the voluntary market for ODS destruction projects, United States would not be the right choice. beginning with a practical overview of project-re- 2. Review existing methodologies for selection. lated access (i.e., how would a company with ODS Once a third-party standard has been select- ed, the project developer would then review on the voluntary carbon market?), and followed by the existing methodologies accepted by that a discussion of the existing and upcoming opportu- standard that could be applicable to the en- nities for ODS destruction on the voluntary markets. visioned project. In some cases, if only one methodology exists for ODS destruction—such as is currently the case for CCX—this step may 5.1 How the Voluntary Market Would - Work for ODS Destruction es—such as the situation under VCS—multiple approved methodologies might be available The broad steps that an organization, such as a for consideration and selection. If one of these company owning a stockpile of ODS, could take methodologies is appropriate for the project in towards developing a voluntary market project are question (e.g., the envisioned project seems eli- described below. gible under the methodology, the methodology seems “doable�), then the project developer 1. Review the voluntary market third-party stan- can move on to the next step. If this is not the dards for selection. A project developer (which case, however, then the project developer gen- could be the organisation that actually owns the erally has two options: either it can seek a revi- ODS bank or an entity working in collaboration sion or deviation to an existing methodology (if allowed), or it can develop a new methodology standards to identify the market that meets the for submission and approval by the third-party needs of the envisioned ODS destruction proj- standard that is being pursued (if the standard ect (e.g., given the standard’s rules, geographi- accepts new methodologies). If neither option cal coverage, etc.). For example, if a project is possible, then the project developer cannot developer intends to carry out destruction out- move forward under the standard selected. This side of the United States, then a standard that issue is described further in Section 5.2 below. FINAL REPORT 19 ACCESSING THE VOLUNTARY MARKET FOR ODS DESTRUCTION 3. Develop a project idea note. Once a methodol- to the owner (or be shared between the owner ogy is selected (or approved), the project devel- and the developer, as negotiated). They would oper usually develops a project idea note (PIN) then market the credits to consumers or com- (see example in Appendix D). This document panies looking to voluntarily offset their emis- describes the project and sets out the business sions. Alternatively aggregators, exchanges or case for the voluntary credit project, as well as brokers could come into play at this point as the additionality case. It determines whether an intermediaries. existing methodology is applicable to the proj- ect or whether a new methodology needs to For national governments that are the legal own- be developed. It also presents the likely costs, expected number of credits the project would through customs, there is no clear precedent for produce, the voluntary standard that would be their participation in the project development side sought, and the potential revenue that the sale of the voluntary market. Generally, government of the credits could generate. Depending on roles have tended to focus on facilitating market the level of in-house expertise, this, and other intervention through capacity building and legisla- project documentation and support, may be tion, although there is some experience with gov- provided by an external consultant. ernments serving as the project developer and 4. Establish funding. The project developer then coordinating entity for a programme of activities has two main options. Either it funds the entire through CDM. Although, technically, there are no project activity itself with a view to selling the credits once the project is registered and the as project developers, the primary concerns sur- credits are issued (see Section 7.2 for full details rounding government participation stem from the of costs) or it uses the PIN to attract interest from treatment of project additionality. For example, - questions could be raised about why a government tal required to support the project through the does not pay for the destruction of ODS banks itself; cycle and fund the destruction process in return for more favorable credit prices, or could sup- a government needs market funding to support it? port just the carbon costs of the project. It may also be possible for their facilitative role to 5. Develop full project documentation. If success- expand; for example, a government might sell its ful, the full project documentation (i.e., the stockpile of ODS, perhaps through an auction, to a project design document or its equivalent, as private entity who could then develop a voluntary - credit project. It could also impose taxes on private scribes the emission reduction activity) would entities that develop voluntary credit projects to be developed and, as outlined in Figure 7, the generate revenue for ODS management or other validation process would begin. (See Appendix environmentally-related initiatives. These opportuni- D for VCS’ project document template.) ties—and the role for governments—are discussed 6. Monitor and verify emission reductions, and re- at more length in Chapter 10. ceive credits. As described in Figure 7, this is fol- of emission reductions generated by the project 5.2 Existing and Upcoming Opportunities by an external auditor. Upon receipt of a com- for ODS Destruction on the Voluntary Market issues the credits. 7. Validation: The project documentation is sub- - mitted for validation. If successful, the project is nance ODS destruction have been limited in the then registered under the selected standard. past. However, as of February 2010, the Chicago 8. Market the credits. Depending on the arrange- Climate Exchange (CCX), the Voluntary Carbon Standard (VCS), and the Climate Action Reserve 20 Study on Financing the Destruction of Unwanted ODS ACCESSING THE VOLUNTARY MARKET FOR ODS DESTRUCTION (the Reserve) represent market platforms that cov- cause CCX is more than an offsets program, it re- er ODS destruction as part of their GHG programs. Eleven ODS destruction projects have been regis- from their operations to commit to an emission re- tered—for a total of 787,300 tCO2e—since the ad- duction schedule. dition of the ODS destruction protocol to the CCX in 2007; these projects earn carbon credits (called For project requirements, limitations in geographical Carbon Financial Instrument® or CFI™ contracts) scope at the standard-level will affect the types of under CCX. The VCS has only recently—as of late ODS destruction methodologies that are accepted January 2010—expanded its GHG program to cov- or developed. While VCS has an international scope, er ODS, by approving a series of eligibility criteria the Reserve has been limited primarily to projects in for ODS destruction projects. The Reserve has most the United States (although a protocol for destroy- recently undertaken efforts to expand its GHG ing ODS imported from A5 countries to the United program to include ODS destruction projects. The States has also been adopted) and CCX has limited Reserve has developed project protocols for ODS eligible ODS destruction projects to those carried destruction for material sourced domestically and out within U.S. borders (although material may also for ODS imported to the U.S. for destruction, which be imported to the United States for destruction). serve as standardized approaches for quantifying Such limitations may present some challenge for the and monitoring reductions in GHG emissions from participation of other countries. ODS destruction projects. Draft versions of the pro- tocols were publicly released in late January 2010 Whether grouping or pooling of projects is allowed and were adopted by the Reserve Board in Febru- ary 2010. ODS destruction through the voluntary market. Given the dispersed location of ODS banks, there may be Table 1 below compares the rules and procedures advantages in grouping a number of ODS destruc- for these three standards and is followed by a dis- tion activities together. This approach, which is al- cussion of the direction each standard has taken lowed under VCS, CCX, and the Reserve—although for including ODS destruction projects as well as the 9 —could possible implications of these rules and procedures involve developing one set of project documenta- on ODS destruction. destruction of ODS banks sourced from a number Some of these rules and procedures will have impor- of different locations or countries. The advantage tant effects on the opportunities for destroying ODS would be leveraging economies of scale and re- for carbon credit in the voluntary market. For exam- ple, while VCS and the Reserve operate as part of entity may be able to source ODS banks under the the open, OTC market (as described in Section 4.2), ownership of a number of different companies and CCX currently operates as a private, formal market develop a project as described above. Govern- that is guided by a voluntary membership-based ments or multilateral organizations could potentially cap-and-trade system. Members commit to a cer- play a role in facilitating this process through, for ex- tain reduction in GHG emissions, which can be met ample, developing an international clearinghouse, be making reductions internally, purchasing credits, which could provide access to information on ODS banks for private sector entities to pursue and de- become a CCX Member and register a project, be- velop. 9 The rules for grouping projects are dependent on the standard being sought. Under the VCS, a “grouped project� is “a number of projects and their related methodologies included in a single VCS Project Description (VCS PD) at the time of the validation.“ Under CCX, a “pooled project� is “the multiple projects that are represented in CCX by a single Aggrega- FINAL REPORT 21 ACCESSING THE VOLUNTARY MARKET FOR ODS DESTRUCTION Table 1: Rules and Procedures in CCX, VCS, and the Reserve Chicago Climate Exchange Offset Program Voluntary Carbon Standard Climate Action Reserve Overview Description The offsets program for a A global standard for A national carbon offsets voluntary cap-and-trade voluntary offsets initiated program in the United program in North America. by the Climate Group, States that works to the International Emissions establish standards for Trading Association, and the GHG reduction projects World Economic Forum. in North America, issues carbon offset credits. Governance Overseen by a Committee Headed by a board, and Headed by a board on Offsets made up of in the process of forming of directors; Center for representatives of CCX advisory groups. Climate Action and Member companies. California Climate Action Registry operate as part of the organization. Members Members are participants Not membership-based. Not membership-based. on the exchange, and Project proponents to date Project Developers to include manufacturers, include energy industries, date include state and organizations, power waste handlers, and offset local government, offset companies, and city and state governments. authorities, and forestry plantations. Market size 55,950,000 tCO2e 8,366,000 tCO2e issued as of 1,646,000 tCO2e issued as registered as of Jan. 2009 Sep. 2009 of Sep. 2009 Credit units Carbon Financial Voluntary Carbon Unit (VCU), Climate Reserve Tonnes Instrument (CFI) contract, equal to 1 tCO2e (CRT) , equal to 1 tCO2e equal to 100 tCO2e Over-the- Private market (although OTC OTC counter or prices are transparent and private market? reported daily) Project Requirements & Limitations Who is eligible Any project developer; Any project developer. Any project developer; to develop developers may become developers must have projects? a CCX Member or (person or organization) Participant Member with an account with the (Offset Provider or Reserve and anyone may Aggregator) to register a apply for an account re- project. gardless of location or af- Geographic International scope International United States (with some allowances for internationally imported material, and protocols applicable in Mexico and Canada soon) Gases covered All six Kyoto gases, and All six Kyoto gases, and All GHGs ODS (for destruction) certain ODS (for destruction) 22 Study on Financing the Destruction of Unwanted ODS ACCESSING THE VOLUNTARY MARKET FOR ODS DESTRUCTION Table 1: Rules and Procedures in CCX, VCS, and the Reserve ( ) Chicago Climate Exchange Offset Program Voluntary Carbon Standard Climate Action Reserve Project start On or after 1 Jan. 2007 for On or after 1 Jan. 2002 date limits ODS destruction; 1 Jan. 2003 for all other offset types After 1 Jan. 2001 (except new project protocols) Is grouping Projects may be grouped Yes, submitted under one Not explicitly, although of projects together by an Offset project document as a allowed? Aggregator as a “pooled “grouped project.� permitted. project.� No No No, not on a project-by- required? project basis, although they are a factor in the selection of project types. Validation and Validation is conducted - by CCX staff. Independent proved under a VCS-ap- Reserve, approved by procedures proved GHG Program (e.g., - CDM, the Reserve) or under terials are public. The Re- ISO 14065 with VCS scope serve does not require that interest must be cleared (through national accredita- validation be conducted tion bodies) are eligible to perform VCS validations and reviewed by CCX staff and - subsequently by FINRA for scopes for which they have ments must be cleared quality assurance. been accredited. Offset Registration Approval The CCX Committee on The VCS Registry reviews The Reserve reviews process Offsets approves project requests for issuance of project forms and then lists credits. proposals where no protocol must then be completed is approved, and project- for registration. are reviewed by CCX staff and subsequently by FINRA for quality assurance prior to issuing offsets. Does the Yes, incorporated with Yes, a project database and Yes, incorporated. standard trading platform. a multi-registry system with have a registry services provided by several system? registry providers. Fees Registration fee: VCS Registration Levy: €0.04/ Issuance fee: $0.20/ tC02e $0.15/tC02e tC02e Transfer fee: $0.03/ tC02e Transaction fee: Registries’ fees (vary by Project fee: $500/project $0.05/tC02e registry): Annual account fee: Annual membership: Issuance fee: $0.05/tC02e $500/year $5000/year Transfer fee: $0.02–0.03//tC02e Annual fee: $100–500/year FINAL REPORT 23 ACCESSING THE VOLUNTARY MARKET FOR ODS DESTRUCTION Table 1: Rules and Procedures in CCX, VCS, and the Reserve ( ) Chicago Climate Exchange Offset Program Voluntary Carbon Standard Climate Action Reserve Project CFIs issued for the year Over a maximum of 10 years, Crediting begins with the crediting in which mitigation took which may be renewed start of the project. Most period place. no more than two times. projects are subject to a Crediting begins only after 10-year nonrenewable reductions begin. crediting period. Double- Project may not be Proof must be provided for Projects must not be counting registered in other offset certain projects that reduc- registered in other prevention registries. All registered tions are not part of another registries. All registered measures projects are publicly listed. emissions trading program or projects are listed publicly. Registry uses serialization to regulatory program. All regis- Registry uses serialization identify and track CFIs. tered projects are publicly list- to identify and track CRTs. ed. Registry uses serialization to identify and track VCUs. Methodologies Can new Yes, CCX may accept Yes. Methodologies must No, project protocols methodologies or reject any proposal or go through the VCS Double are developed by the be submitted approve a project on a Approval process, which the Reserve. for review? proponent pays for. accepting the protocol for application generally. Can projects be Yes, CCX may accept Yes, CDM and the Reserve’s No, can only use the prepared using or reject any proposal or methodologies can also be Reserve’s methodologies. other standards’ approve a project on a used. methodologies? accepting the protocol for application generally. Additionality Established based on an All projects approved The Reserve establishes per- requirements assessment of common under the VCS must be formance standards and practice for a sector; additional, and additionality other criteria that projects projects and protocols requirements are set out in must meet in order to be must be demonstrated the methodology that the considered additional (i.e., to be beyond common project uses. The project must a regulatory test). These practice and regulatory face one or more distinct standards and criteria are requirements for the sector barriers and must be above established separately for in question. and beyond the regulatory each project type. This ap- requirement. proach differs from some other offset programs, where additionality is de- termined using information Does an ODS Yes VCS has expanded its GHG Yes. Two protocols have destruction program to cover ODS been approved for 1) methodology imports from A5 countries exist? methodologies have not and, 2) the U.S. been approved as of this writing (Feb. 2010). CCX 2007, 2009a; VCS 2008a, 2008b; Climate Action Reserve 2009a, 2009b. 24 Study on Financing the Destruction of Unwanted ODS ACCESSING THE VOLUNTARY MARKET FOR ODS DESTRUCTION With regard to tracking and registering projects, all ogy submissions for review and approval. New meth- three standards have associated registry systems. odologies are subject to a double approval process CCX’s registry system is separate from its trading in which two independent validators under the VCS platform, although the systems connect daily for give their assessment of the methodology, and pub- clearing. VCS operates both a project database lic stakeholder comments are also sought.11 Once and a multi-registry system, with registry services these methodologies are approved, they may be provided by several third-party registry providers. used by other projects without requiring additional Opening a registry account is required in all cases approvals. There are advantages and disadvantag- for project credits to be issued. All three standards es to each approach; these are discussed at length assess some fees on project proponents, including in Chapter 8 on methodologies for destroying ODS. fees to open and maintain registry accounts, fees for registering a project and issuing credits, and To date, only CCX has registered ODS destruction transfer fees (e.g., to transfer credits between ac- projects, although VCS has expanded its GHG counts). Given the high GWP of some ODS, the issu- program and the Reserve has approved two new ance fees can be a substantial component of total protocols to cover ODS destruction. With the VCS costs. For example, destroying 100 tonnes of CFC- expansion, VCS is now open to receive methodolo- 12 with a GWP of 10,900 could yield up to 1,090,000 gies for ODS destruction projects and also to reg- credits,10 which would have a registration cost of ister destruction projects that meet its criteria and US$163,500 for CCX. For more detailed project cost use approved methodologies. The Reserve has also calculations, see Section 7.2. completed its process to include ODS in its GHG program. The Reserve began by convening a multi- Some important differences also exist between stakeholder workgroup that worked with Reserve these three standards with regard to methodology staff to develop protocols for ODS destruction (for approval and development procedures. CCX and domestically sourced ODS and for imported ODS the Reserve develop their own project protocols in- from A5 countries); stakeholders included represen- house. CCX will also accept methodology proposals, tatives from industry, government, project devel- which it may accept or reject. It may also approve - ICF.12 Project protocols were publicly released for ing the protocol for application more generally. The Reserve Board approval in late January 2010 and Reserve does not accept other methodologies, im- include projects relating to ODS in refrigerants and plying that the protocols developed by the Reserve foams. The protocols were approved in February represent the only opportunity for destroying ODS 2010 meaning that the Reserve is now accepting under this standard. On the other hand, VCS both projects. Further discussion on the implications of accepts projects prepared under the Reserve and the methodologies and approaches developed is CDM methodologies and accepts new methodol- provided in Chapter 8. 10 Assuming one credit is equal to one tonne of CO2 equivalent. 11 This process is paid for by the project proponent submitting the methodology. 12 Because of their directly relevant work and dialogue undertaken for the ExCom-approved study on opportunities for FINAL REPORT 25 CHAPTER 6 Potential Impact of ODS Destruction on the Voluntary Market Given the high GWP of ODS and its prevalence in struction. Both technical and economic feasibil- common equipment used worldwide, it is important ity of recovery factor into whether ODS banks to consider the amount of ODS that could poten- are reachable; these measures are together tially be destroyed and credited on the voluntary expressed as the “effort� required to collect market over time. In particular, the ban on CFC pro- the ODS by the 2006 Experts Workshop (com- duction and consumption in developing countries missioned by the ExCom) and the TEAP.13 Only reachable banks are included in the estimates soon be recovered and be eligible for destruction developed in this chapter, as described more under a voluntary market program. Because most fully in the methodology provided in Appendix methodologies (see Chapter 8) are expected to C. Generally, ODS in refrigeration applications prohibit crediting for destruction of ODS that has not - yet been fully phased out of production and import, lect (depending on whether the equipment is the Montreal Protocol phaseout dates represent im- located in a densely or sparsely populated re- portant milestones for the potential eligibility of ODS gion), while ODS in foam applications typically for destruction. - - In this chapter, estimates are developed that rep- um effort for collection. resent the portion of the total reachable bank that reaches end-of-life in each year and could be recov- “ �—in other words, these ered and destroyed. - important to understand what is represented by these covered from equipment reaching the end of estimates of ODS potentially available for destruction. its service life and retiring in each year. Only a portion of the total bank is retired and recov- ered in each year. “ �—ODS banks range in their level of accessibility, a fact that has implications for “ �—it is important to the amount of ODS potentially available for de- note three things: 13 Other factors, such as population density, can also affect the effort required to collect ODS. FINAL REPORT 27 POTENTIAL IMPACT OF ODS DESTRUCTION ON THE VOLUNTARY MARKET Instead, upper (50% recovery), middle (10% Exhibit 4 ODS Recoverable from Equipment/Products in Practice recovery) and lower (1% recovery) bound Based on limited experiences to date, the actual quantity of ODS assumptions about the amount of ODS ac- recoverable from equipment/products reaching end-of-life may tually recovered are applied For example, while state-of-the-art recycling facilities are capa- as a means of estimating the range of ODS ble of removing more than 90% of the refrigerant and foam blow- potentially available for destruction. It should ing agent from household refrigerators/freezers (RAL, undated), be noted that the rate of recovery will vary - due to improper appliance disposal methods and the high num- portion of material likely recovered in non- ber of appliances that arrive at recycling facilities with little or no intact ODS. According to one appliance recycling company A5 countries and in A5 countries with more in the United Kingdom, it struggles to recover 50% of the origi- established recovery infrastructure or denser nal CFC refrigerant charge from domestic refrigerators/freezers, population centers. given that so many units arrive at the facilities in poor condition, Lastly and importantly, destruction is not the with little refrigerant remaining (MLF 2008). only option for ODS recovered from reach- - date by the MLF have often been far less than the amounts that nitely or recycled or reclaimed14 for re-use were believed to be recoverable. For example, an expert report in servicing; the latter option is currently at- prepared for the MLF in 2006 (UNEP.OzL.Pro/Excom/48/42) found that of the 4,275 tonnes of CFCs used in refrigerant servicing in tractive because it has an associated rev- 11 countries operating under paragraph 1 of Article 5, only 23 enue stream. However, if projects for ODS tonnes were recovered (UNEP 2009). destruction become more widely eligible in incentives could tip more in favor of destruc- tion over reclamation. This point is discussed First, over the lifetime of equipment, some in more detail later in this report, but is men- ODS is leaked to the atmosphere, thus the tioned here to point out that the balance of full ODS charge is not recoverable at end-of- life. The amount of ODS that is recoverable and destruction will play a role in determin- includes assumptions about the percentage ing the actual amount of ODS that is de- of ODS remaining in the equipment at end- stroyed. of-life; for some equipment types, like house- hold refrigerators, very little ODS refrigerant To develop estimates of the amount of ODS potential- may remain. ly available for destruction, existing projections from Second, it is unlikely that all recoverable a number of sources were employed and expanded ODS will actually be recovered, for a num- upon. For the United States, estimates of ODS recov- ber of reasons including lack of necessary erable at equipment end-of-life were based on U.S. recovery equipment, geographical disper- EPA-provided data from the U.S. Vintaging Model, sion of equipment, cost barriers, and a host which ICF manipulated for this study, and for the Eu- of other factors. Exhibit 4 discusses the differ- ropean Community, modeling estimates prepared ences between ODS actually recovered in by ICF for the European Commission were used with practice and estimates of ODS . permission. For the rest of the non-A5 countries, ODS The result is that the total amount of ODS recoverable at end-of-life was inferred based on recoverable does not equal the amount of estimates developed for the United States and the ODS potentially available for destruction. European Community and ratios of ODS consump- 14 - occurs off-site. 28 Study on Financing the Destruction of Unwanted ODS POTENTIAL IMPACT OF ODS DESTRUCTION ON THE VOLUNTARY MARKET tion pre-phaseout.15 For A5 countries, single year In Figure 9 below, the amount of ODS potentially estimates prepared in the available and eligible for destruction is compared to the projected volume of transactions in the vol- untary market in future years. Because HCFCs are - unlikely to become widely eligible for destruction (UNEP 2006b)—as commissioned by the ExCom before 2020, these ODS are not included, nor are in Decision 47/52—were used, and time trends were any ODS recovered in the European Union Members developed based on the amounts recovered as States, where a requirement for ODS destruction modeled for non-A5 countries. A full description of means that recovered and destroyed ODS are un- this methodology is provided in Appendix C. likely to be eligible for carbon credits (see Chapter 8). As shown, with a 1% recovery rate, the amount of Figure 8 presents the estimates of ODS potentially ODS that could be eligible for destruction for credit- available for destruction from retired equipment at ing represents only about 3% of the total projected end-of-life, assuming a 10% recovery rate. As shown, transaction volume in the voluntary market in 2010, in the coming years, the majority of ODS for destruc- becoming less than 1% by 2020. When compared to tion is expected to be CFCs from refrigeration/AC the compliance market, ODS destruction potential applications, particularly from A5 countries. represents an even smaller percentage, given that the voluntary market in total is about 1% of the com- pliance market volume. By comparison, if 10% of Figure 8 ODS Potentially Available for Destruction ODS was recovered and developed into destruction from Retired Equipment at End-of-Life projects, these projects could represent a quarter to in Millions of tCO2e, Assuming a 10% a third of the voluntary market in 2010—provided Recovery Rate (2010–2050) that demand exists to purchase the projects. 70 65 However, it is considered highly unlikely that by ODS Recoverable from Equipment at EOL, in Million tCO2e 60 2010 more than 1% of recoverable ODS worldwide 55 will be recovered and developed into destruction 50 projects; the learning curve is simply too steep and 45 the barriers still too high (see Section 2.2.2 above for 40 more details on these barriers). Furthermore, while 35 recovery and destruction rates will vary from coun- 30 try to country, they are generally expected to be 25 higher in non-A5 countries, and yet the current state 20 of practice for ODS disposal is still quite minimal 15 even in these countries. For example, the 11 proj- 10 ects that have been registered since the addition 5 of the ODS destruction protocol to the CCX in 2007 0 2010 2015 2020 2025 2030 2035 2040 2045 2050 represent a total of 787,300 tCO2e, or less than 1% A5: Fire Protection A5: Foams (CFC) A5: Ref/AC (CFC) of the total amount of CFC refrigerant and halon (Halon) estimated to be in the United States Other Non-A5: Fire Other Non-A5: Other Non-A5: Protection (Halon) Foams (HCFC) Foams (CFC) Other Non-A5: Other Non-A5: EU: Fire Protection 15 IPCC/TEAP (2005) estimates of ODS banks for non-A5 Ref/AC (HCFC) Ref/AC (CFC) (Halon) countries, such as those developed in the Special Report on EU: Foams (HCFC) EU: Foams (CFC) EU: Ref/AC Ozone and Climate, are inappropriate for this exercise be- (HCFC) cause they estimate static banks of ODS contained in equip- EU: Ref/AC (CFC) US: Fire Protection US: Foams (HCFC) (Halon) from equipment that reaches the end of its service life and is US: Foams (CFC) US: Ref/AC (HCFC) US: Ref/AC (CFC) - sents the portion of the bank that reaches end-of-life in each Adapted from ICF (2008). year and is recoverable. FINAL REPORT 29 POTENTIAL IMPACT OF ODS DESTRUCTION ON THE VOLUNTARY MARKET banks means that ODS destruction projects will rep- Figure 9 Comparing ODS Potentially Available and Eligible for Destruction (Bars) with resent an even smaller percentage of the market the Projected Volume of the Voluntary in later years. The voluntary market is projected to Market (Diamonds), in Millions of Tonnes grow on average about 15% per year over the next of Carbon Dioxide Equivalent decade, based on a survey of over 100 voluntary market participants conducted by Hamilton ODS Potentially Available for Destruction (Bars) and Projected Volume of the Voluntary Market (Diamonds), in Million tCO2e 500 (2009).16 This growth could potentially be mitigated 50% Destruction 476 by the expansion of the EU ETS into additional sec- 450 400 10% Destruction tors and the passage of a U.S. compliance market, 1% Destruction 350 both events which could reduce the pre-compli- 347 300 ance demand in the voluntary market. That said, 250 the past year has demonstrated that a compliance 200 market does not necessarily eliminate the space 180 150 for the voluntary market, with European buyers pur- 100 chasing more than half of voluntary market volumes 50 (Hamilton 2009). Regardless, as the volume of 0 reachable banks decreases substantially over time, 2010 2015 2020 ODS destruction would represent a smaller portion Projected volume of voluntary market of the voluntary market, and as such, even if the ODS potentially available for destruction voluntary market grows more slowly than expected, ODS destruction would still account for a reasonably Member States, nor HCFCs. small portion of the market. Hamilton . (2009). 2010 volume is estimated by sight from Figure 35 of this report. Some notes for interpreting the size of the voluntary market in Figure 9 above are necessary. Demand for new offset credits is likely smaller than the volume of from 2007–2009. This suggests that U.S. recovery and transactions shown in Figure 9 because the turnover destruction rates have not responded in the aggre- rate in the market means that each offset credit can be traded several times before it is retired. In material may instead be going to internal recycling 2008, a credit was estimated to change hands over and reuse, or reclamation and resale. Thus, it seems four times before retirement (Hamilton 2009). safe to assume that the amount of ODS destroyed This means that ODS destruction projects could rep- for credit in the voluntary market should not exceed resent a percentage of the total offset cred- a couple of percentage points of the total amount its demanded by the market than is represented in Figure 9. However, even if the demand for credits in the voluntary market was four times smaller than The rate of recovery and destruction could increase the total volume, with a 1% recovery and destruc- over time, however, as recovery practices become tion rate, ODS destruction projects would still only more common, knowledge and capacity increas- represent about 12% of the volume in the market. It is still worth considering, however, whether there is market expands. Even with increasing recovery rates, though, projected growth in the voluntary these destruction projects. This issue is addressed in market and the decreasing volume of reachable the following chapter. 16 This annual report on the state of the voluntary carbon market is produced by Ecosystem Marketplace and New Carbon Finance, based on input from over 200 participants in the voluntary market, and is considered the most comprehensive 30 Study on Financing the Destruction of Unwanted ODS CHAPTER 7 Financial Feasibility of Financing through the Voluntary Market As demonstrated in Chapter 6, it is clear that, in the- ory, ODS destruction projects have the potential to and attractiveness of using the voluntary market to overwhelm the voluntary market with credits if they are developed to their absolute full potential. How- siderations are discussed in the sections that follow. ever, ODS destruction projects can be more realis- tically estimated to represent closer to 15% of the voluntary market by 2015. This amount represents an 7.1 Availability of Resources from the even smaller percentage of the compliance mar- Voluntary Carbon Market ket, considering that the entire voluntary market represented approximately 1% of the compliance The projected volume of transactions in the volun- market volume in 2008. The amount of ODS poten- tary market masks a number of underlying trends tially available for destruction in 2010 also represents that provide a more telling picture of how the mar- about 1% of today’s compliance market volume ket is developing and what the implications could and just 2% of the EU ETS traded volume (World Bank be for ODS disposal projects. The buyers’ and sellers’ 2009). Looking forward, the compliance market and - EU ETS are expected to grow in the future (e.g., as tion, followed by a discussion of the outlook for the new sectors and gases come on board), while ODS voluntary carbon market. potentially available for destruction will decrease, representing an even smaller piece of the pie. 7.1.1 Challenges from the Buyers’ Perspective Recent voluntary market participant statistics pro- However, simply comparing the volume of potential vide a revealing portrait for how the market is devel- ODS destruction projects to the size of the voluntary oping. Of the four key drivers for buying VERs outlined market does not provide the whole story. A number of in Section 4.2 (reputation, experience, principle and competitiveness), it is the that are resources that can be leveraged from the voluntary market for the destruction of ODS, including the dy- which indicated that corporate social responsibility namics of supply and demand, market perceptions, and public relations/ branding were the primary driv- cautionary attitudes, uncertainty, and potential for fu- ers for purchasing voluntary credits. This is supported ture changing regulatory landscapes. The cost of an by a statistic from the same survey that, in 2008, 29% ODS destruction project—including collection, trans- of VERs were purchased by businesses to offset their portation, and destruction costs, as well as project own emissions, retiring them upon purchase (Hamilton FINAL REPORT 31 FINANCIAL FEASIBILITY OF FINANCING THROUGH THE VOLUNTARY MARKET 2009). In addition, 92% of all voluntary credits 1. . Although traded in 2008 were purchased by buyers either in credits were capped based on historical pro- the United States or Europe, countries where corpo- duction data, critics of HFC-23 destruction proj- rate transparency and stakeholder awareness of cli- ects point out there was a perverse incentive mate change is relatively high (Hamilton 2009). for HCFC-22 facilities to continue production to These statistics demonstrate the current reputational generate HFC-23 for destruction. Because ODS focus that is driving market purchases. prohibited from new production or import under This reputational focus is further illustrated in recent the Montreal Protocol, this perverse incentive buying trends. Generally, buyers have become very does not exist for ODS destruction. - 2. ODS destruction projects destroy unwanted chase. This is seen in the drastic decline in the level compounds that have served societal needs. of interest in, and purchase of, credits from industrial HFC-23 destruction projects reduce emissions gas abatement projects on the voluntary markets. In from one GHG, but also imply the produc- 2006, credit transactions from industrial gas abate- tion of another GHG (HCFC-22). ODS destruc- ment projects totaled 5 million tCO2e and account- tion projects destroy intentionally produced ed for 20% of the total volume of all OTC (i.e., not compounds that exist in surplus and as such including CCX) credit transactions that year. By 2008 are unwanted. In some cases, the ODS being the number of OTC credit transactions from indus- destroyed may be replaced by another high- trial gas abatement projects had fallen to 0.7 million GWP compound, though most ODS destruc- tCO2e (0.6% of total volume that year). In compari- tion methodologies account for this possibility in their calculations of eligible emission reductions increased in market share from 15% to 51% during the (see Chapter 8). same period. Based on recent discussions with volun- 3. ODS destruction projects are more expensive. tary market traders, transactions for industrial gases Because ODS destruction projects are more have further declined in 2009. These changes in cred- costly, it is highly unlikely that ODS destruction will multiply in the same way that HFC-23 de- sentiment towards the different types of project. struction projects did which enjoyed high “prof- it� margins. While the cost of destroying HFC-23 byproduct has been estimated at less than voluntary market buyers, if ODS projects are to be- US$0.2/tCO2e (IPCC/TEAP 2005), the cost of an come a viable voluntary market credit source, then, ODS destruction project can be 5 to 200 times at a minimum, they must be packaged in a way higher, ranging from US$1/tCO2e up to more that is acceptable to buyers and their stakeholders. than US$40/tCO2e (see Section 7.2). ODS project proponents will need to present a good Projects destroying ODS recovered from equipment the credit. Critically, they will need to differentiate at end-of-life may have an easier road forward in themselves from other industrial gas emission reduc- telling a compelling story and differentiating them- tion projects, such as HFC-23 destruction, which selves from other industrial gas projects, while proj- ects aiming to destroy virgin stockpiles (e.g., from the past. For example, it is important to emphasize that voluntary ODS destruction projects help to pay be more challenged in this regard. for the removal of GHGs that, if left unattended, would be emitted over time anyway, making a Another positive aspect of ODS destruction projects strong case for the projects’ additionality. Three as- that will be important to highlight is their reliability pects might be emphasized in distinguishing ODS and predictability—i.e., the emission reductions pre- destruction projects from other industrial gases proj- dicted in project documentation are likely to be very close to the amount monitored and issued ex- 32 Study on Financing the Destruction of Unwanted ODS FINANCIAL FEASIBILITY OF FINANCING THROUGH THE VOLUNTARY MARKET post. This reliability is valued by investors and buyers Exhibit 5 Pre-CDM VERs in both the compliance and voluntary primary mar- kets (ICF 2009). Pre-CDM credits in the voluntary market are originated from projects that have been registered by the United Nations Frame- work Convention on Climate Change’s (UNFCCC) CDM Execu- An additional characteristic of the voluntary mar- tive Board (EB) under the Kyoto Protocol. The VERs are essentially pre-CDM tranches, following the same technology transfer, are currently for pre-CDM VERs; voluntary credits project design and sustainable development approach, and claimed retroactively by CDM projects for emission - ing to the methodologies of the CDM standard. The VERs rep- reductions achieved in the past between the time resent the emission reductions that occurred between the time that the project became operational and the time that the project became operational and the time it received it received CDM registration (see Exhibit 5). Howev- CDM registration. Since these emissions cannot be claimed as er, credits from ODS destruction projects alone are CERs under the CDM, they are claimed as VERs under a volun- tary market standard. For buyers, such credits present a more unlikely to play any role in the market for pre-CDM straight-forward transaction compared to supporting a project VERs because, as non-Kyoto gases, ODS are not eli- through the full voluntary registration cycle. Additionally, due gible to be the subject of CDM projects. to reputational risk concerns, many companies demand high standards and adhering to the same additionality criteria as the CDM provides this necessary security. 7.1.2 Uncertainties on the Sellers’ Side Because of the low price that VERs currently gen- erate in the market place, as well as the lack of a clearing price and associated risk and uncertainty es in the voluntary market have traditionally varied in the voluntary market, investors are generally less considerably depending on the type and location of willing to support voluntary market projects. While the project activity, the standard to which it is de- 2008 average prices for OTC and CCX trades were veloped, the perceived quality of the methodology US$7.3/tCO2e and US$4.4/tCO2e, respectively, in used, and the volume transacted. As demonstrated in Figure 10, this remains the case today, with credits combined impact of the global recession and uncer- from projects with a good “story� behind them, such tainty surrounding future global climate change pol- as solar and other types of renewable energy, still icy (Hamilton 2009), the latter of which is even able to command a premium. Industrial gases proj- more pronounced after outcomes of the December ects have typically earned prices on the lower end of 2009 Conference of the Parties (COP) in Copen- the spectrum, around US$4.6/tCO2e. Prices also vary hagen. OTC trades were between US$2 and US$5/ within project types, such as renewable wind with a tCO2e in July 2009, while CCX trades have dropped high bound price of over US$45/tCO2e. below US$1/tCO2e in September 2009 (ICF 2009). The economic slowdown has similarly affected the This current reality in the voluntary market also means compliance markets, which have also experienced that it is critical for ODS destruction projects to follow declining price trends over the past year; EUA prices robust, credible, and well-regarded methodologies fell from over €20/tCO2e in August 2008 to around to ensure that projects have a good reputation in €13/ tCO2e in September 2009, and primary CDM the marketplace. Inclusion of ODS destruction proj- prices decreased from €10–15/ tCO2e to around €7- ects in the VCS and Climate Action Reserve is a 8/ tCO2e in April 2009 (World Bank 2009). In addition step in the right direction. In 2008, VCS was the most to the declining market, the current strong focus from utilized third-party standard by transaction volume, buyers in the voluntary market for pre-CDM VER cred- with nearly 50% of the total, and the Reserve was third with 10% (Hamilton . 2009). Both VCS and types of voluntary projects, such as ODS destruction. the Reserve also have associated registries. The future price trend will have important implica- Because ODS destruction projects could generate tions for the viability of ODS destruction projects, since a large number of credits—both because of their they can be costly to develop (see Section 7.2). Pric- high GWP and the inevitable need to pursue larger FINAL REPORT 33 FINANCIAL FEASIBILITY OF FINANCING THROUGH THE VOLUNTARY MARKET Figure 10 Credit Price Ranges and Averages by Project Type, OTC 2008 50 45 40 35 30 US$/tCO2e 25 22.0 20 16.8 18.0 15 12.6 10.0 9.6 7.7 10 7.0 8.2 7.5 7.7 5.7 4.6 5.9 6.4 6.3 6.0 6.2 6.1 5.2 5 2.6 3.4 0 Energy Efficiency (30) Fuel Switching (9) Industrial Gas (2) Ag Methane (22) Landfill (40) Coal Mine (4) Fugitive Emissions (2) Geological Seq (1) RECs (2) RE: Wind (64) RE: Solar (6) RE: Hydro (32) RE: Biomass (29) RE: Other (1) AFf/Ref Plantation (32) Aff/Ref Conservation (17) Forest Management (4) Avoided Deforestation (10) Ag Land (6) Other Land Based (1) Other (11) Not Specified (5) Volume-weighted Average Maximum Transaction Price Minimum Transaction Price Hamilton (2009) projects for cost-effectiveness (see discussion in clines being driven by the economic downturn. The Section 7.2 below)—these credits may need to be voluntary carbon market currently represents a small split up into smaller trade sizes that are more attrac- fraction of the global carbon market; this situation tive to buyers. In the voluntary markets, the typical is not likely to change, especially as future interna- trade size is small, on the order of 30,000–80,000 tional climate change policy signals strengthen. An tCO2e. These low volumes are often preferred since expansion of the sectoral and geographical cover- demand is limited to what corporations and indi- age of the EU ETS (which currently focuses only on viduals require for “offsetting,� and as a means of the energy and industrial sectors of the economy), spreading risk across a number of different projects. and the possibility for a U.S. compliance market to Aggregators commonly break up larger projects for - these purposes, and thus ODS destruction project ger term outlook for the voluntary market unclear. sizes should not be an impediment for the market. On one hand, pre-compliance buying in the United States has been an important source of demand in 7.1.3 Outlook for the Voluntary Carbon Market the market, and as such, purchases may decrease Given the rapid development of the carbon mar- as the compliance market coverage increases (i.e., kets so far, it is unlikely that the situation described the space left for the voluntary market diminishes). above will be representative of the markets in the In particular, if an organization must pay for its GHG future. Key considerations and outlook for the future emissions under an emissions trading system it has no are discussed below, along with their important im- further incentive to voluntarily offset these emissions. plications for ODS destruction projects. On the other hand, however, according to a survey of nearly 200 voluntary market participants (Hamil- Looking forward, the decline in the voluntary market ton 2009), sellers believe that corporate social observed through 2009 is expected to be a relatively responsibility and public relations/branding are the short term phenomenon with price and volume de- major drivers for voluntary purchases, to which pre- 34 Study on Financing the Destruction of Unwanted ODS FINANCIAL FEASIBILITY OF FINANCING THROUGH THE VOLUNTARY MARKET compliance is secondary. Moreover, these motiva- untary offset standards for both international- and tions will not necessarily evaporate in the presence of a compliance market; for example, this reputational by state level programs such as the Climate Action demand for VERs could continue from the commer- Reserve and RGGI as well as the VCS, CCX, and cial sectors, which are largely excluded from the compliance markets due to their lack of direct GHG they will be accepted into a U.S. federal cap and emissions. The voluntary market does co-exist with trade scheme. However, this is an open question, the compliance market in Europe—and indeed the as some contrary market opinions believe that such existence of a compliance market gives creditability standards will not be accepted into U.S. federal to carbon trading and offsetting that is important to cap and trade scheme, since they do not provide the voluntary market. Indeed, market participants as vigorous a validation procedure as the CDM (ICF continue to predict growth in the voluntary market— 2009). Even if a standard is accepted, it is possible despite these regulatory uncertainties—through the that not all types of project and project locations next decade (Hamilton 2009). will be eligible. As such, the ability of ODS destruc- tion projects to contribute to the large U.S. demand Another source of demand for credits from ODS de- struction projects could be from the offset provisions U.S. climate legislation is made. in U.S. climate legislation. The current structure of the cap-and-trade bill put forward by U.S. representa- tives Henry Waxman and Edward Markey, as well as 7.2 Cost of an ODS Destruction Project the Kerry-Boxer bill passed by the Senate Committee on Environment and Public Works, indicate a poten- As noted previously, the overall cost of developing tial maximum allowance of 2 billion tCO2e per year an ODS destruction project for the voluntary carbon from offsets.17 Credits from ODS destruction projects market involves several components, including the could potentially be well placed to help meet this costs of collection, transportation, storage, testing, requirement, although they would represent a small and destruction, as well as the costs of project prep- portion of overall offsets—with 10% of ODS recov- ered and destroyed globally, this amount would ac- count for 2% of the 2 billion tCO2e offset allowance they vary widely depending on a host of factors in 2015. For destruction projects taking place in the such as geographical location, nature of the ODS United States, ODS destruction offsets are explicitly bank and the effort required to recover the ODS, accepted; in the version of the Waxman-Markey bill quantity of ODS being handled, technologies used, that passed in the House on June 30, 2009 (H.R. 2454), - provisions were provided in the HFC program for the vices. Estimates of the cost of ODS destruction and issuance of destruction credits for CFC destruction in the transaction costs to develop and register a proj- the United States after 2012, at a rate of 80% of the ect on the voluntary market are provided below, emission reduction achieved through destruction. followed by examples of project cost calculations Other ODS, such as CTC or HCFCs, may also be even- and suggestions for a minimum viable project size. tually considered for destruction offset credits. As requested by Decision XX/7, the TEAP has de- The outlook for international ODS projects or any veloped estimates of the full costs of ODS dis- other offset project registered under one of the posal—from collection to destruction. These are various voluntary standards is less clear. Certain vol- reproduced in Table 2 below, with the exception 17 The Waxman-Markey bill splits this amount 50% (1 billion tCO2e) for domestic offsets from within the U.S. and 50% (1 bil- lion tCO2e) for international offsets outside the U.S., while the Kerry-Boxer bill allows 75% from domestic sources (1.5 billion tCO2e) and 25% from international sources (500 million tCO2e). Both bills also allow for additional international sourcing if domestic offsets are inadequate, with Waxman-Markey allowing international supplies up to 1.5 billion tCO2e per year, and Kerry-Boxer allowing a maximum of 1.25 billion tCO2e. FINAL REPORT 35 36 Table 2: Unit Cost for Destruction of ODS from Reachable Banks Requiring Low or Medium Effort (all Costs Shown in US$ per kg, unless otherwise Indicated) Segregation/ Transport Recovery Transport Average Effort Pop. ODS Collection Costs Processing Costs Destruction Total Cost per Level Sector Density Type Costs (Recovery) Costs (Destruction) Costs Cost tCO2e ‡ Low Domestic Ref. D R 6–10* 6–8 10–20 0.01–0.06** 5–7 27–45 7–11 Effort Domestic Ref. D BA 20–30 37–55 9–13 Commercial Ref. D R 8–12* 8–10 8–15 0.01–0.06** 5–7 29–44 10–15 Commercial Ref. D BA 25–35 5–7 46–64 16–22 Transport Ref.+ D/S R — — 15–20 0.01–0.06** 5–7 20–27 6–8 Industrial Ref. D/S R — — 4–6 0.01–0.06** 5–7 9–13 3–5 ^^ Stationary A/C^ D R 1–2 — 4–25 0.01–0.06** 5–7 10–34 5–16 Mobile A/C D R — — 4–6 0.01–0.06** 5–7 9–13 1–2 Fire Protection D F 1–2^^ — 4–25 0.01–0.06** 6–8 11–35 3–11 ^^^ Medium Domestic Ref. S R 10–15* 30–40 10–20 0.01–0.06** 5–7 55–82 13–20 Study on Financing the Destruction of Unwanted ODS Effort Domestic Ref. S BA 20–30 65–92 16–22 Commercial Ref. S R 15–20* 40–50^^^ 8–15 0.01–0.06** 5–7 68–92 24–32 Commercial Ref. S BA 25–35 5–7 85–112 30–39 Stationary A/C S R 1–2^^ — 10–35 0.01–0.06** 5–7 16–44 7–21 ^^ Mobile A/C S R 1–2 — 4–6 0.01–0.06** 5–7 10–15 1–2 FINANCIAL FEASIBILITY OF FINANCING THROUGH THE VOLUNTARY MARKET Steel-faced Panels D BA 75–90 5–10 30–40 0.01–0.06** 5–7 115–147 38–49 Block – Pipe D BA 10–15 15–20 30–40 0.01–0.06** 5–7 60–82 22–30 Block – Slab D BA 80–100 5–10 30–40 0.01–0.06** 5–7 120–157 44–58 Fire Protection S F 1–2^^ — 10–35 0.01–0.06** 6–8 17–45 5–14 * Very dependent on local collection strategy; ** Covering shipment distances of 200–1000 km for destruction; note that longer distances (such as those incurred through export- ing materials) may incur higher transport costs. + Refrigerant only. ^ Assumed on-site recovery; ^^ Awareness raising for recovery schemes; ^^^ Shipping complete units. ‡ Calculated for this report based on the average GWPs given for each sector for developing countries in TEAP (2009a). Source: TEAP (2009b). FINANCIAL FEASIBILITY OF FINANCING THROUGH THE VOLUNTARY MARKET of the average cost per tonne of CO2 equivalent cost shown for ODS, which ranges from US$9–$157/ (tCO2e), which has been calculated for this report. kg, depending on the sector and effort level. This Other implementation costs may also be incurred, may be a result in part of the nature of the ma- such as the cost of insurance for shipping ODS in- terial as it relates to collection, transportation and ternationally, which can be quite substantial as il- destruction costs. lustrated in the Indonesia case study in Appendix A. In addition to the cost of ODS collection, transport, As shown, for most applications the majority of the and disposal, developing a project for the voluntary total cost is related to collection, transport, and market incurs certain transaction costs, which are recovery. This is supported by past experience in not included in the estimates provided in Table 2. managing the destruction of obsolete persistent or- These transaction costs are summarized in Table 3 ganic pollutants (POPs) and pesticides, which has and include the cost of project preparation, vali- shown that the collection, repackaging, transport - tion, such as fees to join a carbon credit standard proportion of the overall costs of their safe removal and issuance fees. These costs vary considerably depending on the scale, location and complexity and/or the materials are highly dispersed. The cost of the project. Costs can also be incurred to meet of packaging, transporting, and destroying POPs project monitoring requirements, which may entail has ranged from US$3–5/kg, depending on the additional investments; these costs are not quanti- type of chemicals and their condition, location, and any transport issues (e.g. landlocked countries, by-project basis. accessible roads) and other factors such as secu- rity, oil price and currency exchange rates (FAO To illustrate the total costs incurred to develop, imple- ment, and register ODS destruction projects on the Table 3: Indicative Transaction Costs for Project Preparation and Registration Item Description Cost range (US$) Project This is typically the cost of consultant support to undertake an initial $0–60,000 preparation feasibility assessment, develop project documents, and support the validation and registration processes. This cost may be considerably lower than estimated if local consultants (in-country) are used or, particularly, if expertise exists in-house to undertake these tasks. Third-party $0–40,000 validation particularly simple or small projects. Note that this fee is not required for CCX or the Reserve. Third-party $20,000 lower for particularly simple or small projects. For projects carried out (annual) on an ongoing or multi-year basis, this would be an annual cost. One-off Some standards charge project proponents to open a registry $0 – 500 joining fee account (needed to have credits issued). Some standards also (plus annual charge an annual fee for registry account maintenance. For fee) example, the Reserve charges US$500 per year for this service. Project fee Some standards charge a project submission fee. For example, the $0 – 500 Reserve charges US$500 per project. Issuance/ Some standards charge an issuance fee per credit (tCO2e) issued. For $0.05 – 0.20 US$/ registration example, CCX charges 0.15 US$/tCO2e, while the Reserve charges tCO2e fee 0.20 US$/tCO2e. Climate Action Reserve (2009a); VCS (2008c); ICF International estimates. FINAL REPORT 37 FINANCIAL FEASIBILITY OF FINANCING THROUGH THE VOLUNTARY MARKET Table 4: Example ODS Destruction Project Cost Calculations Total Project Carbon Credits Break-even Cost (thousands Generated Carbon Market Project Description Project Size of US$)† (tCO2e)‡ Price (US$/tCO2e) Refrigerator Collection:* 1,000 units collected $151 3,599 $42.07 Collection of CFC-containing refrigerators, and recovery 10,000 units collected $430 35,990 $11.94 and destruction of CFC-12 refrigerant and CFC-11 foam 100,000 units collected $3,212 359,900 $8.93 Bulk ODS: Destruction of 0.5 tonnes destroyed $124 5,450 $22.72 stockpiled CFC-12 1 tonne destroyed $127 10,900 $11.67 10 tonnes destroyed $187 109,000 $1.72 Large AC Units: Recovery 1 tonne per system/ $142 10,900 $13.00 and destruction of CFC- facility 12 refrigerant from large 1,000 tonnes per $21,310 10,900,000 $1.96 stationary AC units system/facility 10,000 tonnes per $212,011 109,000,000 $1.95 system/facility * Assumes that 0.06 kg of CFC-12 and 0.62 kg of CFC-11 are recovered from each unit. † Includes project transaction costs and average costs of recovery, transport, and destruction. These costs are based on those shown in Table 2 and Table 3, but could be higher or lower depending on the local costs of recovery, transport, and destruc- tion, as well as whether local or international consultants are engaged for project preparation. The higher bound of the project transaction costs were used for this analysis, so costs could be lower if, for example, project preparation is carried out in-house at no or low cost, or third-party validation costs are not incurred. ‡ In this table, the calculation of carbon credits generated is gross, i.e., it is not net of project emissions such as emissions during the destruction process or CO2 emissions from the transport of ODS to the destruction facility. Credits are calculated using AR4 GWPs (as is used in all calculations in this report). voluntary market, a series of example project cost First, associated new infrastructure costs—such calculations have been developed, as presented in as the construction of new ODS central collec- Table 4. In this table, the break-even cost represents tion, storage, or destruction facilities, or the ret- the price that would have to be generated in the carbon market in order to cover full project transac- accept ODS for destruction—are not included in tion and recovery, transport, and destruction costs. the cost calculations. Many of these costs may be substantial one-time investments. For exam- market price would have to exceed this break-even ple, building a new destruction facility can cost price. As shown, the break-even price decreases as upwards of half a million dollars. Australia’s plas- the project size increases, as a result of realizing proj- ma arc facility, capable of destroying roughly ect economies of scale associated with the mostly 65 kg/hr cost roughly US$1.4 million (including installation and training), while one of Japan’s comparison of these break-even prices to the aver- catalyst dehalogenation facilities had an initial age price of an industrial gas carbon credit on the cost of roughly US$360,000 and destroys 6 kg/ voluntary market in 2008. hour (MLF 2008). By comparison, a superheated steam reactor with a 25 kg/hr capacity can cost These break-even prices must be interpreted cau- US$500,000 (Pedersen 2007). Modifying existing tiously, since a number of important additional fac- facilities can be more cost-effective, though still tors could push the break-even prices up or down (as indicated by the arrows below). ODS has been reported as costing between 38 Study on Financing the Destruction of Unwanted ODS FINANCIAL FEASIBILITY OF FINANCING THROUGH THE VOLUNTARY MARKET US$50,000 and US$100,000 (see Appendix A for Figure 11 ODS Destruction Project Break-even the case study on Indonesia’s experience). Costs Compared to the Average Price for an Industrial Gas Carbon Credit - $45 ciated with the collection of ODS-containing $40 equipment is that collection is most often (and $35 than by ODS type. As a result, different types of $30 US$/tCO2e refrigerant can be gathered up in mass collec- $25 tion efforts that are not eligible for destruction $20 credits, thereby potentially decreasing the cost- $15 effectiveness of collection. For example, house- $10 hold refrigerators collected through a curbside $5 $0 pickup program might include both CFC-12 1,000 units collected 10,000 units collected 100,000 units collected 0.5 tos destroyed 1 ton destroyed 10 tons destroyed 1 tons per system facility 1,000 tons per system facility 10,000 tons per system facility and HFC-134a refrigerators. Because HFCs are not eligible for voluntary market destruction credits under ODS destruction protocols (since new production and import of HFCs are still al- Stationary AC lowed), they would represent a cost without Refrigerator Collection Stockpiles Large ODS an associated carbon credit revenue. Credits against HCFC and HFC destruction in the future have not been ruled out. Average price for an industrial gas carbon credit in the voluntary market = US$4.6/tCO2e Third, ODS destruction projects may be able Hamilton et al. (2009). earn other revenues from the collection of ODS equipment. In particular, the recycling of metal components—such as the bodies of re- demand side management programs. Some frigerators—can represent substantial revenue relevant CDM methodologies have already streams that make some collection programs been developed, such as the approved small scale methodology (AMS) II.C, which credits for from the generation and sale of carbon cred- its for destruction. ODS destruction may also be such as through refrigerator replacement. These partnerships can greatly increase the revenue - potential—or share the cost burden—of ODS taining equipment, or with utilities undertaking disposal. FINAL REPORT 39 CHAPTER 8 Methodologies for ODS Destruction in the Voluntary Market Before an ODS destruction project can be under- production of ODS solely for the purposes of gener- taken in the voluntary carbon market to earn car- ating destruction credits, or the destruction of ODS bon credits, applicable methodologies must be in that may be needed for future use (e.g., to meet place to guide the project development, valida- servicing needs or for feedstock uses). - ter 4 above, methodologies specify the project to ac- 18 activity and the criteria for determining the eligibility count for the wide range of sources and scenarios and additionality of projects. Thus, a critical step in from which unwanted ODS originate and must be the process toward accessing the voluntary carbon accessible to A5 country participants. In order for - the voluntary carbon market to be a viable option ment of robust and credible methodologies. be made of the different needs and capacities of For ODS destruction, the development and approval project proponents around the globe. For example, of credible methodologies serves multiple purposes. given that many A5 countries may not have suitable First, methodologies can ensure that ODS destruction destruction facilities, methodologies should allow for - the export of unwanted ODS to other countries for able manner, in order to reinforce a good reputation ultimate disposal. for real reductions that result from the destruction of intentionally produced GHGs that otherwise would These goals are closely related to an underly- have been emitted to the atmosphere. The devel- ing challenge, namely that the development of opment or approval of methodologies by third-party methodologies is either determined by the vol- standards serves as a guarantee to provide assur- untary market standard itself or driven by the pri- ance to market investors and buyers that the car- vate market and thus not centrally directed. While bon credits issued to projects following a particular some voluntary market standards (e.g., the Re- methodology are real, additional, and permanent. serve) develop their own project methodologies Methodologies must include carefully crafted pro- and do not accept outside methodology submis- visions to avoid perverse incentives that could be sions, other standards (e.g., VCS) do not develop created by crediting ODS disposal projects, such as methodologies themselves and instead accept 18 - struction of ODS. FINAL REPORT 41 METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET methodologies developed by other standards or A public entity or multilateral institution acting on private sector actors, often in conjunction with the behalf of the interests of those signatories could also develop and submit a methodology, if thought to both its own project methodologies (as it has done be needed. In fact, the World Bank has played this for ODS destruction) and also accepts methodolo- role by developing a number of GHG methodolo- gies for submission, which it may approve or reject, gies that were intended for wider use and ensured that strategic interests, in terms of the global public general applicability. goods in question, were addressed. This difference on the origin and acceptance of The remainder of this chapter introduces the vari- the methodology could have important implica- ous sources of ODS and project scenarios that would tions for ODS destruction projects. For example, as need to be covered by ODS destruction method- each of the Reserve’s protocols limit the sectors ologies, then presents key elements for a robust and or geographic regions from which ODS can be re- transparent methodology and criteria that are neces- covered or destroyed, a project proponent can- not propose a project under the Reserve based and assesses existing ODS destruction methodologies on another methodology to bypass these param- developed to date based on these criteria. eters. At most the Reserve could decide to review or revise its protocols.19 Under the VCS—which will also accept projects prepared under the Reserve’s 8.1 Sources of ODS and Project Scenarios methodologies—or CCX, if a company wanted to Unwanted ODS for destruction can stem from a number of different sources. For example, ODS methodology did not exist, the company might banks are held by industrial and commercial users, create a methodology in the context of develop- - ing its project. While a standard like VCS provides a tion and air-conditioning equipment, contained in vital quality check through its approval processes, building and appliance foams, and so on. Many it does not control what methodologies are submit- of these banks are unwanted because of a lack of ted for review. The development and submission of need or demand for their use, such as ODS materials methodologies is primarily an undertaking of the pri- contained in retired equipment or storage contain- vate sector, driven by the project desires and needs ers that no longer have a market value; ODS re- covered from equipment that is too contaminated guarantee that methodologies generated by the for recycling or reclamation; or, material that can- private sector—or by the Reserve or CCX—can not be cost-effectively reclaimed due to the lack meet the project requirements of all signatories to of reclamation infrastructure. For the health of the the Montreal Protocol. This is not a question of the stratospheric ozone layer and global climate, it is integrity of the methodologies, but rather a question critical that these unwanted ODS be properly col- of the focus that methodologies developed by the lected and destroyed.20 private sector under VCS, for example, take. These may not necessarily cover all possible project sce- In order to illustrate the range of circumstances in narios that might arise in different A5 and non-A5 which unwanted ODS are found—and which ODS countries. This is true for any carbon offset project independent of the particular sector it covers. to cover—six scenarios are presented below. Each 19 The Reserve has developed a project protocol for destruction of ODS sourced and destroyed within U.S. borders, and a separate protocol for destruction of ODS sourced from A5 countries and imported to the United States for destruction. 20 As mentioned previously, the recycling and reclamation of some ODS will be essential to satisfy after-market servicing de- mand, and so a proper balance between destruction projects and servicing must be sought within a national approach. 42 Study on Financing the Destruction of Unwanted ODS METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET scenario is accompanied by a description of how a gram, and now the recovered ODS is unwanted suitable methodology would be adaptable to the project type. The scenarios are as follow: a destruction facility and/or high costs generally prevents destruction of the stocks. In this sce- 1. ODS Recovered from Equipment in the Past, nario, documentation on the origin of the ODS is with Incomplete Documentation lacking due to either poor recordkeeping or lost 2. ODS Recently Recovered from Equipment, with Appropriate Documentation source of the ODS in this scenario, although in 3. Accessible ODS Stocks in Use (“Banked�) in general, volumes would tend to be small (i.e., a Equipment few metric tonnes). 4. Stockpiles of Mixed or Contaminated ODS that In order to allow this ODS to be destroyed and to cannot be Reused receive carbon credits, a methodology must al- low projects to be eligible with some basic level 6. Virgin ODS Stockpiled in Industrial Storage Alternatively, the use of a volume threshold— An important theme illustrated by the scenarios is balancing the amount of ODS at which illegally that unwanted ODS will have been recovered at pursuing destruction becomes attractive with different times relative to the approval of a meth- the minimum volume needed for a viable proj- odology for ODS destruction, a fact that has impli- ect—could be used to determine eligibility. cations for the extent of documentation that can 2. ODS Recently Recovered from Equipment, with be reasonably expected. For example, some ODS Appropriate Documentation—This scenario in- recovered in the past (e.g., under scenarios 1, 4, 5, cludes ODS recently recovered from equipment with appropriate documentation to verify that it came from eligible decommissioned equip- ODS collected after the approval of a methodology can be expected to meet documentation require- ments, ODS recovered in the more distant past are owing to destruction costs or a lack of access less likely to have full documentation. However, the to destruction facilities. In this case, good docu- destruction of that material is still important. Meth- mentation is available to demonstrate eligibility. odologies should rise to this challenge of ensuring The project methodology simply must accept real reductions through rigorous documentation re- the destruction of ODS recovered from a variety of equipment. destruction of long-since recovered ODS with less 3. Accessible ODS Stocks in Use (“Banked�) in documentation on its origin. Equipment—After ODS production and con- sumption phaseout dates are reached, ODS The scenarios, and how a methodology might cov- currently in use in equipment will become a er them, are described below. source for ODS recovery and destruction. Under this scenario, ODS is recovered approval 1. ODS Recovered from Equipment in the Past, with of an ODS destruction methodology and thus Incomplete Documentation—This scenario con- should be expected to meet all methodology cerns stockpiles of ODS previously recovered requirements. from equipment—such as refrigerators, industrial 4. Stockpiles of Mixed or Contaminated ODS that chillers, air-conditioning units, commercial freez- cannot be Reused—ODS recovered under this scenario are mixed or contaminated to such a is incomplete documentation about the origin degree that they cannot be reused. (Note that of the ODS. Recovery may have been part of this scenario may overlap with others, as these an earlier phaseout effort, a voluntary initiative, contaminated ODS can come from a variety of municipal program, or industry buyback pro- sources.) In many cases, evacuated ODS refrig- FINAL REPORT 43 METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET erant is mixed in with lubricating oils, or may be good chance of being incomplete, the meth- consolidated with different types of refrigerants. As a result, it cannot be reused as is and/or may circumstance. not be technically or economically feasible to 6. Virgin ODS Stockpiled in Industrial Storage— reclaim; the only remaining options are perma- Some entities have stockpiles of virgin refriger- nent storage, illegal venting, or destruction. ants in storage that are either phased-out or To cover this unwanted ODS, an ODS destruc- have been subject to production closure. These tion methodology must allow for project devel- ODS might have previously been destined for opers to destroy mixed ODS and claim credit for installation in new equipment, but for any num- the various amounts of different ODS destroyed. - In addition, the methodology might make an cial issues, and so on), the virgin ODS was never exception for the destruction of non-reclaim- able, contaminated ODS that has not yet been The stocks may consist of several to hundreds of phased out of production, with appropriate tonnes and are typically stored in large industri- proof of contamination required. Otherwise, al tanks. Because most countries have banned the import of certain virgin ODS, these cannot subject to storage costs, and ultimately fully be sent elsewhere to meet servicing needs, and leaked to the atmosphere over time. the remaining options are permanent storage, 5. — unintentional or illegal venting, or destruction. Many countries around the world have en- As is the case in scenario #5, a project method- acted regulations to restrict the import of virgin ology that permits destruction of bulk stockpiles ODS, with some countries completely banning of ODS (i.e., not recovered from equipment) should cover these circumstances. - ing illegal shipments into the country. ODS ship- 8.2 Elements for a Robust ODS Destruction - Methodology sence of a regulatory requirement for ODS de- struction, there is no guarantee that the ODS - will be destroyed, especially given the cost of odology for the destruction of unwanted ODS doing so. An often complicating factor is that should meet in order to be considered robust, cred- many national regulations prohibit the use or itable, and widely applicable for use by both A5 and non-A5 countries. These criteria are also con- ensuring compliance to the Protocol. As a re- sistent with the ISO 14064–2:2006 standard on guid- sult, the ODS may end up in a Customs’ stor- GHG emission reductions, which was developed by over time or released into the market, and in the International Organization for Standardization some cases, vented—inadvertently, or other- (ISO) to be “regime neutral� and thus able to be wise. Customs’ storage facilities are unlikely to used as the basis for any program. This standard is be designed for long-term storage, and the fre- well-accepted for GHG projects; for example, VCS quent movement of items in the storage space uses these requirements as the basis for its standard. can increase the likelihood of damaging a tank. These factors contribute to a high overall These criteria relate to eligibility requirements, ad- risk of unintentional venting. ditionality requirements, guidance on develop- A project methodology that permits destruction ing a baseline scenario and calculating emission of bulk stockpiles of ODS (i.e., not recovered reductions, and guidance for monitoring and re- from equipment) should cover this scenario. In cordkeeping. Table 5 below presents these criteria, addition, as records for illegal shipments have a along with recommendations for each to ensure a 44 Study on Financing the Destruction of Unwanted ODS METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET Table 5: Criteria and Recommendations for a Robust and Widely Applicable Methodology A good methodology Examples and recommendations for a robust and widely applicable should: methodology: Eligibility/Applicability Clearly specify the types of All ODS should be eligible, as long as the ODS have been phased out ODS that are eligible completely in the country of origin (not including essential/critical use circumstances. For example, if ODS have been phased out in certain sectors (e.g., commercial refrigeration) but not in others, ODS recovered from the sectors in which the ODS has been phased out could be eligible for destruction. In addition, ODS that have not been phased out or other halocarbons (like HFCs) might also be considered eligible for destruction if they are part of a blend that cannot be easily separated or are contained in a contaminated mixture. These exceptions are also proposed in one of the methodologies for ODS destruction (EOS Climate) and are discussed at more length in the following Section 8.3. Clearly specify geographic Destruction should be eligible in any country, as long as other technical eligibility (i.e., where criteria can be met. destruction can take place) Clearly specify the types of A wide range of destruction technologies should be permitted, as long destruction technologies that as the technologies are approved or meet screening criteria for ODS are eligible destruction (e.g., by TEAP (2002)). Clearly specify the technical DRE requirements should meet TEAP (2002) guidance of 99.99% for requirements for destruction concentrated sources at 95% for dilute sources. Emission limits for other facilities meet TEAP (2002) guidance. Ensure that ODS are destroyed Project developers should abide by local regulations to ensure that ODS by facilities legally permitted classed as hazardous waste is only destroyed by those facilities permitted to to do so do so. Ensure that ODS produced for This can be achieved by requiring that the ODS being destroyed be phased the sole purpose of earning out in the country in which it originated, and requiring documentation as destruction credits are not to the origin of material. An appropriate balance must be sought here eligible between requiring rigorous documentation and also ensuring that ODS that was recovered in the distant past and is missing documentation or ODS that destroyed for credit. Ensure that ODS is imported/ Project developers should abide by local laws. exported in accordance with national regulations and international treaties Additionality method for determining and surplus, implementation barriers, common practice test, performance demonstrating additionality threshold, etc.). At a minimum, projects should demonstrate or attest that there are no international, national, state, or local regulations requiring ODS destruction, and that destruction is not common practice. FINAL REPORT 45 METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET and Recommendations for a Robust and Widely Applicable Methodology Table 5: Criteria and Recommendations for a Robust and Widely Applicable Methodology ( ) A good methodology Examples and recommendations for a robust and widely applicable should: methodology: Emission Reduction Calculations Clearly describe the project A wide range of project scenarios, as described in Section 8.1 (e.g., activity destruction of bulk ODS, etc.), should be included. In addition to the ODS being destroyed, other sources of emissions all relevant greenhouse gas associated with the destruction process should be subtracted, such as sources, sinks, and reservoirs fuel and electricity use associated with the destruction process, emissions (SSRs) for the project activity associated with the destruction process, and emissions associated and baseline, including those with the destruction process, such as CO2 emissions from the transport of that are directly attributable to the ODS. The project boundary should extend from the transportation of the project activity (controlled the ODS from a consolidation point to the destruction facility, and include by the project proponent) and any emissions through to the actual destruction of the ODS. If the ODS are those related to or affected by being recovered from equipment, and likely replaced with a substitute the project activity compound, the emissions from that substitute might also be included; this issue is discussed at more length in Section 8.3. Provide a clear methodology An equation should be provided including the elements described above. for identifying, justifying, and quantifying a baseline scenario Provide a clear methodology An equation should be provided including the elements described above. for quantifying the overall emission reduction, including subtracting direct and indirect SSRs for the project activity Clearly describe the timing for Crediting should be one-time, upfront, at the time at which the ODS is crediting destroyed. This approach is administratively most simple and provides upfront to destroy, ODS. For ODS destruction, the carbon market is the only revenue stream for project developers, so upfront crediting is important. Monitoring and Recordkeeping Clearly specify the types of These data might include DRE, amount and characteristics of ODS fed data to be measured and to a destruction unit, consumption and characteristics of energy used by recorded (including units of destruction unit, operating parameters during destruction, etc. measurement) Clearly specify the monitoring/ These might include performance test standards, laboratory analytical testing methodologies methods, sampling procedures, calibration requirements, etc. Internationally recognized testing standards, such as those published by the Air- Conditioning, Heating and Refrigeration Institute (AHRI) (e.g., AHRI 700-2006 Clearly specify the times Such as prior to shipment, prior to destruction, and during the actual and periods during which destruction of ODS. monitoring should take place Clearly specify roles and respon- While most monitoring is likely to take place at the destruction facility, sibilities for monitoring and data responsibility may also need to be taken for testing prior to shipment to the collection and storage destruction facility. Clearly specify other Any data or documentation requirements should be made clear. documentation requirements for project validation and 46 Study on Financing the Destruction of Unwanted ODS METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET robust methodology that can be applied widely for Voluntary Carbon Standard (VCS): This extension a range of project scenarios in both A5 and non-A5 of scope provides for the inclusion of ODS under - the VCS Program by establishing broad eligibility tions of existing methodologies for ODS destruction criteria for destruction projects. are compared and considered with these criteria Climate Action Reserve: The Reserve has devel- and recommendations in mind. oped two project protocols for ODS destruction— one covering ODS sourced from and destroyed in the United States, and the second covering 8.3 Comparison of Known ODS ODS sourced from A5 countries and imported for Destruction Methodologies destruction to the United States. The information - To date, to the best of our knowledge, four methodol- nal drafts of these protocols released for Reserve ogies and an approved scope extension for including Board approval in January 2010. ODS under the VCS program21 have been developed for destroying unwanted ODS for purposes of earning These methodologies and approach have some carbon credits through the voluntary carbon market. important similarities and differences in terms of the As of February 2010, offset methodologies under CCX eligibility of different project and ODS types, addi- and the Reserve have been approved for use in proj- tionality determinations, and calculations of emis- ect development. The VCS extension of scope de- sion reductions as captured in the analysis below. They are also summarized in Table 6. methodology submission under VCS. The other two methodologies have been submitted to or shared ODS sources—the EOS Climate and CCX meth- with VCS and the Reserve and were used as input odologies and VCS extension of scope all apply into the development of each standard’s respective to a wide range of sources of ODS. The Reserve’s program. These four methodologies and one exten- sion of scope are as follow: extinguishing agents are not allowed. The EOS ARGE/Tanzer/USG (Austria): This methodology Climate methodology is especially comprehen- sive in this regard, including a long discussion - of possible project scenarios for generating un- covery and destruction of CFCs from domestic wanted ODS and mentioning the possibility of refrigerators. additional scenarios. On the other side of the EOS Climate: Also stemming from the private spectrum, the ARGE/Tanzer/USG (Austria) meth- sector, EOS’s methodology establishes criteria odology project activity is limited to CFCs recov- encompassing a wide range of projects, with ered from end-of-life refrigerators and freezers; selected project types described in extensive this methodology also requires both refrigerant and foam recovery and destruction. and emission reduction calculations. ODS types—again, the EOS Climate and CCX Chicago Climate Exchange (CCX): The CCX methodologies apply to a range of ODS types, protocol allows ODS destruction from a wide provided those ODS meet the eligibility criteria range of sources, but requires the ODS to be de- (e.g., have been phased out of production/ stroyed in the United States. Note that this pro- import). The Reserve’s protocols currently apply tocol has recently gone through a review and only to CFC refrigerants (primarily CFC-11 and updating process. CFC-12) and to CFC and HCFC blowing agents. 21 Although the VCS extension of scope is not considered a “methodology� FINAL REPORT 47 METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET Table 6: Comparison of Selected Methodologies and Approach ARGE / Tanzer / EOS VCS Extension USG (Austria) Climate CCX of Scope The Reserve Open to a Destruction Set of eligibility Destruction recovery of CFC wide range in the U.S. criteria for in the U.S. of refrigerant and of ODS inclusion of blowing agent destruction ODS from ODS in the VCS refrigerants or from refrigerators projects a range of program foam blowing Project Activity and freezers sources agents Applicable to ODS in: Bulk/stockpiles Appliances Commercial/Industrial Ref/AC Equipment Foams Fire Equipment Aerosols ODS accepted (if eligibility criteria met): CFCs HCFCs a a CTC Halons HFCs b Eligibility and additionality criteria: Methodology applies to destruction in any country, if other eligibility criteria met ODS must be phased out of production and import in the country where the ODS has resided Exception for stocks that are contaminated c sector has a phaseout ODS destruction cannot be required by law in country where project is executed Exception for low compliance rate with destruction law 48 Study on Financing the Destruction of Unwanted ODS METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET Table 6: Comparison of Selected Methodologies and Approach ( ) ARGE / Tanzer / EOS VCS Extension USG (Austria) Climate CCX of Scope The Reserve ODS destruction cannot be common practice in sector/country where project is executed TEAP-approved d technology must be used Emission reduction calculation: Emission reduction calculation includes: Amount fed into n/a destruction unit DRE of facility/process n/a Fuel use of destruction n/a process Electricity use of n/a destruction process Emissions from n/a transportation at various stages Carbon dioxide n/a emissions from incineration Substitution of new n/a refrigerant e lculation n/a provided for foams Timing for crediting: Upfront at the time of destruction Guid n/a data to be monitored n/a required CCX 2009b; Climate Action Reserve 2010a, 2010b; VCS 2010. a HCFC-141b and HCFC-22 foam only for the U.S.-based protocol b If recovered as part of a blend with ODS that cannot be separated c By proposal to CCX only. d Facility must meet Clean Air Act Amendments and Resource Conservation and Recovery Act (RCRA) requirements; this al- e The calculation of the emission reduction including the emissions from the ODS substitute is determined differently in the EOS Climate and the Reserve’s methodologies, as discussed at more length below. FINAL REPORT 49 METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET VCS covers CFCs and HCFCs. As mentioned pre- ed States (but also accept material imported viously, the ARGE/Tanzer/USG (Austria) method- to the U.S., with the Reserve limiting imports to ology applies only to CFCs. those from A5 countries), ODS destruction may The EOS Climate methodology is unique in take place in any country, as long as the facility accepting non-phased out ODS and HFCs meets certain requirements, such as the use of a - TEAP-approved destruction technology or meet- stances, namely if those substances are recov- ing certain screening criteria, such as the dem- ered as part of a blend with ODS that cannot onstration of a certain destruction and removal be separated. One alternative is that project proponents could pay for the destruction of all reputable international guideline that can be contaminated cylinder contents—with some used by all countries worldwide. Although ODS of those contents not being eligible for carbon may be imported to the United States for de- struction, the actual destruction must take place at a U.S. facility under CCX and the Reserve’s from moving forward, however, would likely be methodologies, as mentioned. However, as il- determined on a project-by-project basis. As the lustrated in the case studies to this report (see, project cost analysis in Chapter 7 demonstrates, for example, Indonesia in Appendix A), there are possible challenges associated with exporting 30% of the amount destroyed was not eligible ODS to another country for destruction, includ- for crediting. Other project types are barely (or ing higher costs and regulatory hurdles, that may make the use of the CCX and Reserve’s proto- was creditable. In the past, at least one ODS cols less appealing for dealing with ODS stock- destruction project has been known to move piles from A5 countries in certain cases. forward with destruction of non-eligible materi- To avoid creating a perverse incentive to pro- als. In one case study of ODS destruction under- duce ODS for the purpose of destruction, all taken for crediting (see Appendix A), a private methodologies specify that eligible ODS must company paid for the destruction of containers be phased out of production and import in the - country where the ODS has resided. EOS Climate ited for the CFC destruction through CCX. also adds two exceptions here: namely that if Thus, such an exception for contaminated ma- the ODS is contaminated, it may be destroyed - for credit regardless of the phaseout status, and ity of projects, especially in A5 countries, where a large proportion of cylinders are expected to ODS recovered from that sector is eligible for be contaminated with HCFCs or HFCs. A valid crediting, even if other sectors continue to the concern with crediting the destruction of non- use the ODS type. As discussed previously, both phased out materials in contaminated mixtures - is that it creates a perverse incentive for inten- bust documentation to ensure that they are not tional contamination of CFCs with, for example, abused. HCFCs or HFCs, in order to generate additional To ensure that the GHG emission reductions are carbon credits. For higher priced compounds, additional, all methodologies specify that ODS such as HFC-134a, this might be less of a con- destruction must not be required by law in the cern, but for less expensive ODS, like HCFC-22, country where the project is executed. Such a it could be problematic. These issues should be requirement will likely disqualify the European considered as the rules for crediting ODS de- Union Member States from eligibility under these struction develop and evolve. methodologies, but should not prevent a col- Eligibility and additionality criteria—except un- lection project in Senegal, for example, from der the CCX and Reserve’s methodologies, sending ODS for destruction in European facili- which restrict destruction activities to the Unit- ties. The ARGE/Tanzer/USG (Austria) method- 50 Study on Financing the Destruction of Unwanted ODS METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET ology and VCS extension of scope, however, The EOS Climate methodology, on the other both provide an exception for low compliance hand, subtracts off the baseline emissions the with laws requiring ODS destruction. The EOS difference between the continued use of the Climate, CCX, ARGE/Tanzer/USG (Austria), and baseline ODS and the new use of the substitute Reserve methodologies all also layer in an ad- ODS for the remaining lifetime of the equipment ditionality measure of common practice, such in question. The EOS methodology also requires that if destruction is not required by law but is project proponents to specify the origin and common practice in a certain sector or country, GWP of the ODS; the years of expected contin- the ODS destruction project may not be eligible. ued use of the ODS refrigerant in the absence of Emission reduction calculation - the destruction projects; the amount of GWP of tion of baseline and project scenarios and sub- the refrigerant that will replace the ODS being sequent calculation of the emission reduction destroyed; and leak rates of the existing source can be fairly complicated. EOS Climate, CCX, of ODS and new replacement equipment (us- ARGE/Tanzer/USG (Austria), and the Reserve’s ing actual performance data).23 This informa- calculations factor in not just the amount of ODS tion is then used to calculate the incremental actually destroyed, but also emissions resulting impact of the replacement; the EOS Climate from the transport of ODS to the destruction fa- methodology notes that in some cases project cility, the fossil fuel use of the destruction facility proponents might be able to increase their total associated with the ODS destruction, emissions emission reductions if leak rates are much tight- from the use of electricity during the destruc- er in new equipment, for instance. tion process, and emissions associated with the In calculating the total emission reduction, the destruction process.22 Baseline scenarios must Reserve differs in an important aspect: baseline and project emissions are calculated over a would have been under “business-as-usual� cir- ten-year timeframe. This means that the differ- cumstances; for example, in most project cat- ence between the emissions that would have egories in the EOS Climate methodology, 100% occurred in the baseline (e.g., leakage from eventual emission of the ODS is assumed in most old equipment) and the project emissions (e.g., cases, with the exception of halons and foam leakage from the new, replacement equip- applications. Under the Reserve’s project proto- cols, baseline emissions are calculated assum- Any emission reductions that might have oc- ing the destroyed ODS has instead been used curred past the ten-year period are not cred- in existing refrigeration equipment, with default ited. The impact of this ten-year period has not leak rates for that equipment. Another important aspect of the emission re- somewhat reduce the amount of credits earned duction calculation that EOS Climate and the under this protocol relative to, for example, the Reserve’s methodologies, as well as VCS’s ex- CCX methodology. tension of scope, include is emissions associ- Timing for crediting—all methodologies and ated with replacement of destroyed ODS with the VCS extension of scope provide for upfront substitutes. The Reserve’s protocols account for crediting, at the time that destruction occurs. For a deduction in the overall emission reduction example, if a project recovers and destroys ODS based on a shift to an ODS substitute, providing that otherwise would have been slowly emitted default GWPs and leak rates for ODS substitutes over time from retired refrigerators, the credit is to feed into the project emission calculations. provided when the ODS is destroyed instead of 22 During a high temperature thermal destruction process, the carbon in ODS is converted to CO2 and emitted. 23 For projects destroying “ODS recovered from either operational or decommissioned equipment used for commercial refrigeration, industrial process refrigeration, comfort cooling for commercial and residential buildings, motor vehicle air conditioning, and other refrigeration/air conditioning applications.� FINAL REPORT 51 METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET when the ODS would have been emitted from the data needed to be recorded at each step of refrigerators in the baseline scenario. Crediting the destruction process. based on when the ODS would have been emit- ted in the baseline would be extremely compli- As the discussion above has illustrated, there are cated. important differences among the methodologies —all three method- that affect how widely they can be used by pro- ponents in countries that are Parties to the Mon- data that will be required to be monitored and treal Protocol, for both eligibility and complexity - reasons. As noted, the ARGE/Tanzer/USG (Austria) tion. Figure 12 illustrates the most likely type of Figure 12 The Process of ODS Destruction and Illustrative Recordkeeping Requirements Equipment Mixed/Contaminated Confiscated Virgin ODS Banks Stocks Stocks Stocks Examples of Common Recordkeeping Requirements Documentation on source of ODS (e.g. use, location) Collection Proof of ownership Recovery rate for specific equipment Consolidation C Quantity and types of ODS and Storage Shipping manifests International transport and Customs documents, as applicable Transport Distance traveled by each mode of transport Fuel economy for each mode of transport Emission factor for each fuel type used Quantities of ODS Testing Type of ODS (e.g., through gas chromatography) Proof that facility is certified for ODS destruction Destruction and Removal Efficiency Amount fed into destruction unit Destruction Electricity consumption by destruction facility Emission factor for grid electricity, including grid losses Fossil fuel consumption of destruction facility Fossil fuel emission factor 52 Study on Financing the Destruction of Unwanted ODS METHODOLOGIES FOR ODS DESTRUCTION IN THE VOLUNTARY MARKET type, while the CCX and the Reserve’s protocols types, in an effort to reduce that complexity, and a can only be used for projects where the destruc- short user guide could be developed to assist proj- tion is carried out in the United States. Unlike CCX, ect developers. the Reserve’s protocols limits eligible imports for de- struction to those from A5 countries and proposes In the case of ODS destruction particularly, there is a time limit for the import of eligible virgin stockpiles a clear need to strike a balance between being ro- for destruction. The Reserve also limits eligible ODS bust and being user-friendly in order to engage both to refrigerants and foam blowing agents, exclud- A5 and non-A5 Parties. As can be seen through the ing halons. The VCS extension of scope also ex- numerous requirements for developing, document- cludes halons. The EOS Climate methodology is ing, implementing, and verifying an ODS destruction the most comprehensive and is clearly intended project for crediting through the voluntary market, to encompass a broad range of project circum- a minimum technical capacity might be needed to stances worldwide. However, the complexity of undertake such projects depending on project im- this methodology—with requirements spanning 126 plementation arrangements. In some A5 countries, - this capacity may not exist, and this is a critical con- ect developers or any project where resources and sideration for developing an effective strategy for capacity for project development may be limited. using the voluntary market to fund ODS destruction That said, the methodology does contain mod- and one that is taken up further in the concluding ules that can be streamlined for individual project chapter of this report. FINAL REPORT 53 CHAPTER 9 Challenges and Potential Solutions As this report has demonstrated, there are numer- 9.1 Avoiding Perverse Incentives and ous opportunities and challenges associated with Unintended Consequences carbon market. While several third-party stan- Because of the high GWP and potentially high dards have already included ODS in their GHG volumes of ODS that could become available for destruction, destroying ODS for voluntary market opportunity for future ODS destruction project - development—a number of challenges must be ect proponents. While this is good news for those overcome in order for the voluntary market to be- holding stockpiled or banked ODS, it also means that perverse incentives could be created for pro- - duction of ODS solely for the purpose of earning scribes those major challenges along with possible destruction credits (including illegal production of - phased out ODS, such as CFCs, or export from one ries: country with legislation that requires destruction to another that does not), false reporting of quantities, Avoiding perverse incentives and unintended mislabeling of ODS, and other activities to promote consequences; generation of carbon credits. Addressing ODS not covered by the voluntary market; Most of the countermeasures to these perverse in- Dealing with challenges for buyers and sellers in centives can be put in place through recognized the voluntary market; and well-established voluntary market standards supported by robust and transparent methodolo- destruction projects; gies. The use of a reputable third-party standard Addressing special needs of some A5 countries; (such as VCS, CCX, or the Reserve) represents the and best strategy for ensuring that the emission reduc- Restrictions on export/import of ODS for de- tions achieved through ODS destruction projects struction and accessing ODS destruction ca- have a measurable effect. These standards have pabilities. established rules and requirements for third party - Many of these challenges are also illustrated through ibility of carbon credits. While the incentive of earn- ing carbon credits effectively uses the market to of this report. promote best practices—i.e., the more ODS that FINAL REPORT 55 CHALLENGES AND POTENTIAL SOLUTIONS makes it to the destruction facility, the more credits in 2015 if not enough HCFC refrigerant is recovered are earned, and thus there is a disincentive to han- and reclaimed. dle the ODS in improper ways that result in release— robust methodologies are also essential to ensure Whether ODS will be diverted from reclamation/ that ODS destruction projects are carried out in an recycling to destruction will largely depend on the environmentally sound and creditable manner. price signals from each activity. Both reclamation and destruction have an associated cost as well Standards including the CCX, Reserve, and VCS as an associated revenue—resale of the reclaimed have developed, or are in the process of develop- ODS in the case of the former, and the sale of car- ing ODS program rules that serve to address many bon credits for the latter. The relative costs of rec- of these perverse incentives. For example, CCX lim- lamation versus destruction, as well as the relative its eligible ODS materials to those ODS whose pro- market prices of reclaimed ODS versus carbon cred- duction has been phased out under the Montreal its, will affect the movement of unwanted ODS to- Protocol and Title VI of the CAAA. As such, the per- ward reclamation or destruction. However, the high verse incentive to produce ODS solely for destruc- GWP of ODS may indicate that the price signals are tion for carbon credits is avoided. Other perverse more likely to favor destruction over reclamation. incentives such as false reporting of quantities and It is important to note, however, that currently few mislabeling of ODS will be addressed through the ODS are thought to be recovered at all, let alone re- incorporation of detailed monitoring and reporting claimed or destroyed. Including ODS destruction in procedures for verifying where and how the mate- the voluntary carbon market provides a potentially rial being destroyed was generated. While no stan- - dard or methodology can be expected to prevent rial, which can serve the purposes of both reclama- all illegal activity, these types of requirements can tion (particularly for meeting servicing needs after go a very long way toward ensuring that only real, new production is prohibited) and destruction. ODS destruction are credited in the voluntary mar- For critical applications—such as CFCs and halons ket. As discussed at more length in Chapter 8, the in aerospace and defense applications—many methodologies and approach for ODS destruction governments or private entities already own the currently being considered are reasonably success- ODS material they need for future servicing and ful at addressing these concerns. have placed that material in critical reserves. Bar- ring overall supply shortfalls (or other restrictions - like tax barriers), users with critical needs should be ing ODS destruction through the voluntary market able to purchase the material they need regard- may also create unintended consequences worth less of the market for destruction, as long as they - are willing to pay a higher price since they would centive to destroy ODS, some ODS that would have be competing with destruction and the carbon otherwise been reclaimed or recycled might instead credit price. From an environmental perspective, be destroyed. Because the ODS in question can no if ODS is destroyed instead of reclaimed, this may longer be produced or imported,24 reclamation/re- force the switch to alternatives more quickly, which cycling of these ODS can be important for ensuring could produce a positive effect. Accelerating equipment replacement can mean the transition meet future servicing needs. For example, in the Unit- ed States, a U.S. Environmental Protection Agency low-GWP alternatives, which is good for the cli- (EPA) report (2008) found that the U.S. refrigeration and AC industry may face shortage risks beginning Because critical or essential use exemptions—such 24 In order to be eligible for destruction, the ODS in question would have to be phased out from production and import. 56 Study on Financing the Destruction of Unwanted ODS CHALLENGES AND POTENTIAL SOLUTIONS as for new CFC production for servicing household credits issued for ODS destruction projects could be refrigerators in A5 countries—are extremely unlikely discounted by a certain set percentage (regardless to be entertained by the Parties, it will be impor- of the type of ODS being destroyed) to account for tant for countries to undertake proper planning to the negative net GWP of halons. Halons represent a ensure the proper allocation to reclamation and very small portion of total ODS banks—less than 3% destruction streams. of global banks on an unweighted basis, according to TEAP (2009a)—but have a large net GWP (more than -30,000 for halon 1301), which could affect the 9.2 Addressing ODS Not Covered by the magnitude of the discount. Whether or not such an Voluntary Market approach is adopted, the Montreal Protocol com- munity should remain part of this important conver- Members of the Montreal Protocol community have sation about how halons will be dealt with in the voluntary market. the GHG programs of the Reserve, VCS, and CCX. That said, because voluntary market standards op- erate GHG emission reduction programs, without 9.3 Dealing with Challenges for Buyers - and Sellers in the Voluntary Market grams being developed for destroying ODS through the voluntary market are not necessarily designed As discussed in Section 7.1, some challenges exist to comprehensively address emissions from all ODS from both the buyers’ and sellers’ sides of the volun- banks. The goals of the GHG market may not always tary market. On the buyers’ side, ODS projects will need to be packaged in a way that is attractive This is true for many sectors generating GHGs. Con- to buyers and their stakeholders. Given the reputa- sequently, active dialogue with the global carbon tional motivation for many voluntary market buyers, community becomes increasingly important. ODS project proponents will need to differentiate themselves from other industrial gas projects that For example, while the destruction of halons is al- have drawn criticism (and lower carbon prices) in lowed under CCX, halons have not been included the past, such as HFC-23 destruction. A potentially under the ODS destruction programs under the Re- - serve and VCS. The current uncertainty surrounding tion projects to tell a compelling story emphasizing a negative net GWP (direct plus indirect) of ha- that they help pay for the removal of GHGs that lons makes the climate case for destroying halons would otherwise be emitted over time if left unad- somewhat challenging (IPCC/TEAP 2005). However, if halons are not eligible for carbon crediting, then from HFC-23 destruction projects are described in - Section 7.1.1. For projects that destroy ODS recov- nitely (and often in inappropriate conditions for ered from equipment at end-of-life, this may not be long-term storage) or vented if other funding to de- stroy the halons is not made available. For example, for projects that destroy virgin stockpiles, although countries of the Gulf Cooperative Council have nu- - merous stockpiles of halons that are currently stored ternative may be leakage to the atmosphere over the long- or short-term. incentive to destroy these stocks, the fate of the ha- lon remains unknown, especially as storage capac- From the sellers’ side of the market, uncertainty ity becomes scarce. about carbon prices will be an ongoing challenge that is inherent to the carbon market. Because One possible solution to this challenge would be to break-even carbon prices range considerably for incorporate a discount into the crediting schemes ODS destruction projects (see Section 7.2), the to account for halons. In other words, the number of price that can be earned on the market will be FINAL REPORT 57 CHALLENGES AND POTENTIAL SOLUTIONS an important determinant of whether projects are for example, a voluntary market price of over US$40/ undertaken. Prices depend on a variety of factors, tCO2e would be required for a project that only col- including: the standard to which the project is de- lected 1,000 refrigerators. The consequence is that veloped and the perceived robustness of the meth- odology used. In the past, low prices on the CCX without additional assistance. market have contributed to decisions not to move forward with an ODS destruction project. This was Government-owned ODS could use revenue from the situation in Argentina, where some CTC was highly cost-effective projects to fund their destruc- sold to Mexico for feedstock use rather than de- tion in less cost-effective projects. Such mechanisms stroyed in the U.S. for crediting under CCX (see the may be viable. For example, a country government Argentina case study in Appendix A). If project de- velopers are uncertain about whether a project will fund a program to collect domestic refrigerators trends in the voluntary carbon market on a real- at end-of-life and destroy the recovered ODS. Al- time basis could be helpful for stakeholders; credit ternatively, a pilot project for destroying ODS could price information is publicly available for CCX on its website ( ). Prices for replacing old equipment or facilities and thereby the OTC market are not generally disclosed publicly gather more ODS for destruction. For the private but are available indirectly through several sources, sector, however, there can be no expectation that including an annual report published by Ecosystem Marketplace and New Carbon Finance (available used to cover expenses for other activities without at ). government intervention. The situation for the pri- vate sector is further complicated by the fact that The next section addresses possible opportunities for ODS destroyed in one project versus another could - very likely have different owners. struction projects. Thus, in order to increase the viability of using the 9.4 Obtaining Financing for ODS destruction, additional options may need to be in Destruction Projects with Low Cost- effectiveness projects are used to fund other needed but less cost- effective activities to manage ODS. One possible Some ODS destruction projects will clearly be more solution would be for governments to impose a tax cost-effective than others. As discussed in Section on the sale of VERs earned through ODS destruction projects, the revenue from which could be put in a costs associated with participating in the voluntary - market—costs including project document prepa- ing for less cost-effective projects. Such a tax would be similar to that levied by the Chinese government that larger volume projects achieve some econo- on the sale of CERs earned from the destruction mies of scale and are more cost-effective. Certain of HFC-23 (a byproduct of HCFC-22 production), project activities are also more costly to implement; which was then put into a government fund for for example, collecting household refrigerators and other sustainable development activities. While the freezers from a sparsely populated area is substan- Chinese government’s tax rate of 65% on the sale tially more expensive on a per-kilogram-of-ODS ba- of CERs was feasible for the HFC-23 project type, a sis than recovering ODS from industrial systems or lower tax rate would be required for ODS destruc- simply destroying existing stockpiles. As Section 7.2 tion. The cost of an ODS destruction project (from demonstrates, the carbon credit prices required to collection to transportation to destruction) could be 200 times higher than the cost to destroy HFC-23 58 Study on Financing the Destruction of Unwanted ODS CHALLENGES AND POTENTIAL SOLUTIONS Table 7: Examples of Tax Revenue Generated per Project (All Costs and Revenues Shown in Thousands of US$) Destruction of stockpiled Recovery and destruction of CFC-12 Project Type CFC-12 (no recovery) refrigerant from large stationary AC units 10,000 tons per Project Size 10 tons destroyed 1,000 tons per facility facility Carbon Credits Generated 109,000 10,900,000 109,000,000 Gross Revenue* $501 $50,140 $501,400 Project Costs $187 $21,310 $212,011 10% Tax Tax $50 $5,014 $50,140 on Gross Revenue Net $264 $23,817 $239,250 Revenue† 20% Tax Tax $100 $10,028 $100,280 on Gross Revenue Net $214 $18,803 $189,110 Revenue† Totals may not sum due to independent rounding. * Assuming a VER sale price of US$4.6/tCO2e, the average price of an industrial gas credit in the voluntary market in 2008. † Equal to gross revenue minus project costs minus tax. byproduct for some project types, such as for col- lection of household refrigerators in small volumes developed in Chapter 7. As shown, assessing a 10% (see Section 7.2).25 For ODS destruction projects, the tax on a large stationary AC project destroying tax rate could be differentiated depending on the 1,000 tonnes of CFC-12 could generate over US$5 type and size of the project being undertaken; for million in tax revenue, or upwards of US$50 million for example, for more cost-effective projects such as a project destroying 10,000 tonnes. those destroying existing stockpiles or recovering refrigerant from industrial equipment, a higher tax These substantial tax revenues could go a long way could be assessed. For less cost-effective projects, such as the collection of household refrigerators, a as domestic refrigeration collection and destruction. lower or no tax could be levied. If the tax rate is dif- For example, the cost of a project that collects 10,000 ferentiated, care must also be taken to avoid per- refrigerators is estimated to be close to half a million verse incentives, such as the incentive to break up - larger projects into smaller efforts in order to avoid able project could fund several municipal refriger- taxes on larger volume projects. ator collection projects in a given country. Or, this revenue could be used to subsidize the replacement Building on the project cost examples developed of ODS-based equipment with non-ODS alterna- in Chapter 7, Table 7 above provides examples of tives, thereby creating a self-sustaining mechanism tax revenue that could be generated by assessing for funding and conducting replacement activities a 10% or 20% levy on the sale of VERs for projects while also collecting ODS for destruction. destroying 10 tonnes of stockpiled CFC-12, or recov- ering and destroying CFC-12 from large stationary AC units in large volumes. These project types were 25 The cost of destroying HFC-23 byproduct has been estimated at less than US$0.2/tCO2e (IPCC 2005) compared to up- wards of $40/tCO2e estimated for the collection of 1,000 CFC-containing refrigerators. FINAL REPORT 59 CHALLENGES AND POTENTIAL SOLUTIONS capacity in A5 countries for the phaseout and man- the cost-effectiveness of projects. One way to do - this is to couple ODS destruction projects with other able A5 countries to effectively participate in the activities that are eligible for crediting in the carbon carbon market is a different issue. Programs such as the World Bank’s Carbon Finance Assist program, for chiller or refrigerator replacement. By combin- UNEP Risoe, and the Nairobi Framework27 have the ing an ODS destruction project with an energy ef- express purpose of helping developing countries build the capacity to participate in carbon markets. for both types of credits and increase revenues. But even with these programs’ assistance, some A5 Governments could also capitalize on existing pro- countries—particularly in Africa—have never devel- grams, such as municipal programs to take back oped a carbon market project, either for CDM or household appliances, and use the existing recov- for the voluntary market, and local capacity and ery infrastructure to keep costs down. knowledge of the carbon market and how it op- erates may be limited. While private sector actors in A5 countries may know how to collect ODS for grouping or pooling project activities.26 Such an approach is allowed under the VCS (activities must be submitted under one project document) and market project (including potentially complicated CCX (where projects can be grouped by an Offset - Aggregator). By gathering up a series of activities dle for some countries. (e.g., refrigerator collection in several different mu- nicipalities) to earn more carbon credits, projects In some cases, private sector companies from non- can reduce transaction costs and be more cost- A5 countries could see a good investment and lead the project development effort in an A5 country. However, some initial help might be warranted. In- 9.5 Addressing Special Needs of Some important role in overcoming this initial hurdle and Article 5 Countries catalyzing the market. IFIs could initially provide While countries with active or larger carbon mar- taper off their participation as the private market kets including China and Brazil may be well poised to move into the voluntary market for ODS destruc- fund could also provide the added advantage to tion, the current capacity of some less developed countries to participate in the development of ODS price for the carbon credits. destruction projects through the voluntary market is limited. To improve this capacity, A5 countries may IFIs could also provide guidance to A5 countries on need to draw on certain resources and sources of the step-by-step process for developing an ODS de- assistance to facilitate the process. struction project or a standard template for describ- ing projects to project developers and investors. - For instance, the World Bank’s Carbon Finance Unit nance capacity. While the MLF has built important developed templates for project idea notes (PINs). 26 The rules for grouping projects are dependent on the standard being sought. Under the VCS, a “grouped project� is “a number of projects and their related methodologies included in a single VCS Project Description (VCS PD) at the time of the validation.� Under CCX, a “pooled project� is “the multiple projects that are represented in CCX by a single Aggrega- 27 The Nairobi Framework was initiated by UNDP, UNEP, the World Bank Group, the African Development Bank, and the Secretariat of the UNFCCC to help least developed countries, especially those in sub-Sahara Africa, to improve their level of participation in CDM. 60 Study on Financing the Destruction of Unwanted ODS CHALLENGES AND POTENTIAL SOLUTIONS These could be adapted for ODS destruction. Exam- - ples of potentially useful and applicable templates tive of the voluntary carbon market. As discussed are provided in Appendix D of this report. in Section 9.4, possible solutions for dealing with low volumes of ODS are to combine projects with other Another option for facilitating the connection be- activities that are also eligible for carbon credits, tween possible projects and investors would be to - create a type of international clearinghouse that ciency credits, or to group projects together to re- could serve as a centralized inventory of ODS banks duce transaction costs. However, grouping project and potential project activities. The clearinghouse activities across countries may be administratively would serve to connect owners and investors: banks (e.g., amounts, types, and location) would be listed be aware of opportunities across borders. For a in the inventory, and interested project developers multinational company, this might be feasible, but or investors could contact ODS owners to make ar- for a local developer it would be much more chal- rangements to develop an ODS destruction project. lenging. The international clearinghouse described An international clearinghouse would also make it above could also facilitate the coordination of proj- easier for project developers in non-A5 countries, for ect opportunities. instance, to become aware of potential projects in or technical capacity to carry out the project on 9.6 Restrictions on Export/Import of ODS their own. This clearinghouse-type function could for Destruction and Accessing ODS be managed by the Ozone Secretariat, capitalizing Destruction Capabilities on its existing data management role with regard to reporting under Article 7. Collection of data on ODS A critical challenge to the ability of both A5 and banks could be coordinated at the national level non-A5 countries to participate in the voluntary by each country’s national ozone unit (NOU), which market is countries’ regulatory restrictions on the already has systems in place to collect ODS pro- export/import of ODS for destruction. Existing policy duction, consumption, and other data. Although it frameworks in some countries may not allow, or fa- cilitate, the export/import of ODS for destruction. banks, companies should have an incentive to list Addressing these restrictions would be critical to their banks with the clearinghouse since it repre- sents a potential investment opportunity. NOUs may ODS destruction. For example, in Saudi Arabia, ex- port of ODS is currently prohibited, implying that if reporting that would be effective in their countries. destruction of those materials is to take place, it In addition, depending on how the clearinghouse must happen domestically, unless regulations can was created, it might also be feasible to have the be changed (see case study in Appendix A). In ad- clearinghouse pay for itself. For instance, if a small dition, some countries face regulatory hurdles in the fee (like a broker’s fee) was assessed on success- export of unwanted ODS for destruction. Indonesia, ful connections between entities owning ODS and for example, requires a cumbersome government project developers, then the clearinghouse could approval process for all ODS and hazardous waste exports. Consequently, the Indonesian government instead adapted a domestic cement kiln for ODS Another challenge to the participation of some A5 destruction (see case study in Appendix A for further countries is the volume of recoverable ODS and the details). cost-effectiveness of resulting projects. Given the economies of scale associated with larger projects, However, few A5 countries have existing capacity some A5 countries—especially the low-volume con- to destroy ODS, and building new destruction facili- ties is not always feasible, cost-effective, or environ- small amounts of ODS that are not cost-effective to mentally sound, given the carbon footprint of new FINAL REPORT 61 CHALLENGES AND POTENTIAL SOLUTIONS construction. This particular challenge is somewhat extent to which this variation will occur has yet to be experienced. voluntary market or otherwise, the issue of limited Article 5 countries may also be able to facilitate ODS technical capacity to actually destroy the material destruction by utilizing existing infrastructure and min- needs to be overcome. One option is to use mobile imizing the construction of new facilities. For exam- destruction units, current models of which can de- ple, the Nordic Environmental Financing Corporation stroy hazardous waste at rates of 5 kg per hour and is planning an initiative to recover and destroy ODS can provide a cost-effective destruction option for from end-of-life appliances in the greater Moscow small stockpiles of ODS (MLF 2008). For countries with region, using an existing retailer network for collec- ODS export restrictions, CCX and the Reserve may tion (see case study in Appendix A for details). While the units must be transported to Finland for recovery voluntary market, since these standards are already and destruction, this can be accomplished by utiliz- expected to limit eligible projects to those carried ing the idle capacity of the Finnish trucks that deliver out in the United States, at least in the near-term. new refrigerators to Russia and often return empty. CCX also accepts ODS imported to the United Furthermore, the demanufacturing of refrigerators States for destruction. VCS, however, is expected will be conducted at an existing facility that has the to accept ODS destruction projects carried out capacity to handle more units than it currently pro- throughout the world. The value of ODS destruction cesses. Projects which minimize the implementation project credits could vary depending on the loca- of new infrastructure and utilize existing capacity are tion where destruction is actually carried out; the also a way to destroy ODS at lower cost. 62 Study on Financing the Destruction of Unwanted ODS CHAPTER 10 Towards a Comprehensive Strategy for Financing ODS Destruction through the Voluntary Market Because little ODS is currently thought to be re- struction from both an infrastructure and demand covered at equipment end-of-life, the possibility point-of-view, then describing the potential roles of of earning carbon credits through the voluntary the members of the Montreal Protocol community - in facilitating such a program, next proposing sever- nancial incentive for recovery and destruction of al strategies for minimizing the cost of ODS destruc- unwanted ODS, which would likely otherwise be eventually released to the atmosphere. In addi- ODS tion, since the voluntary carbon market represents destruction projects. - rate from the MLF, in theory the use of a voluntary 10.1 Is There a Market for ODS Destruction? implication for the MLF and the non-A5 country governments that replenish the Fund. In that sense, This question is fundamental to whether the volun- the voluntary market seems like a win-win oppor- tary carbon market represents an opportunity for tunity; incentives are created for the recovery and - destruction of ODS through the carbon credits that sic market structure to support ODS destruction and can be earned, and buyers pay for real and veri- - its from ODS destruction projects in order for the ODS that would have otherwise been emitted. As scheme to succeed. the previous chapter has demonstrated, however, a number of perceived and real challenges exist to 10.1.2 Basic Market Structure At the most basic level, in order for ODS destruc- broadly across all countries, all project types, and tion projects to be credited, there must be GHG project sizes. programs covering ODS—i.e., third-party voluntary standards that offer carbon credits for projects that This chapter lays out important elements for a pos- destroy ODS—and methodologies to guide those sible global program or approach towards ODS de- ODS projects. As of February 2010, CCX, the Reserve and VCS all cover ODS destruction projects in their of whether there is or could be a market for ODS de- GHG programs. FINAL REPORT 63 TOWARDS A COMPREHENSIVE STRATEGY FOR FINANCING ODS DESTRUCTION THROUGH THE VCM Thus, there are three standards offering credits for a short period of time, such as over a few years. ODS destruction projects. With regard to available - methodologies, CCX already offers a project proto- ed through the CCX market for ODS destruction, col to guide ODS destruction projects, as does the 11 projects have been registered—for a total of Reserve (two protocols in fact) to be used for ODS 787,300 tCO2e—since the addition of the ODS de- destruction. VCS will rely on the submission of ODS struction protocol to the CCX in 2007. This amount destruction methodologies by project proponents represents less than a percent of the total amount and other entities, and several methodologies have of CFC refrigerant and halon estimated to be - already been submitted. in the United States from 2007 to 2009, suggesting that U.S. recovery rates have not yet While the basic market structure to support ODS responded in the aggregate to this incentive. That destruction projects is now in place, some stan- - dards provide a more restricted opportunity for tion through the voluntary market expands and participation by all Parties to the Montreal Proto- knowledge and capacity grows, participation and col, at least in the short-term. Under CCX, only proj- recovery rates could also rise over time. But even ects carried out in the United States are eligible for with increasing recovery rates, growth in the vol- crediting, although importing unwanted ODS ma- untary market and a decrease in the volume of terial to the U.S. for destruction is also allowed. The reachable banks means that ODS destruction proj- Reserve also limits eligible projects to those carried ects will be a small percentage of the market in out within the United States, although material im- later years. ported from A5 countries to the United States for destruction are eligible under a separate project Apart from volume concerns, another important protocol. From the outset, VCS appears to be the aspect of ensuring that there is a market for ODS most international in scope, as destruction is eli- destruction projects will be to clearly differentiate gible in any country that can meet the technical ODS destruction projects from past industrial gas requirements. projects, such as the destruction of HFC-23, which have encountered criticism in the carbon markets. 10.1.2 Demand for ODS Destruction Credits ODS destruction projects differ from HFC-23 destruc- - tion projects in several important ways (see Section mand in the voluntary market for ODS destruc- 7.1.1). Indeed, ODS destruction has a compelling story: it extends the prior success of the Montreal between the volume of ODS destruction projects Protocol in phasing out the consumption and pro- that could be registered, and the overall project- duction of ODS to cover the missing part—emis- ed size of the market. As discussed in Chapter 7, sions—and, as such, ensures that the full lifecycle there could be a substantial amount of ODS avail- of ODS is addressed from initial production to end- able for destruction in both A5 and non-A5 coun- of-life recovery and disposal. Highlighting these tries, depending on the rate of recovery. Given advantages will be important for creating a good currently low rates of recovery, ODS destruction reputation and demand for ODS destruction proj- could represent at most a quarter of the voluntary ects in the voluntary market. market volume in 2010 (assuming a recovery and destruction rate of 10%, which is likely optimistic for It is also possible that in the early years of an ODS many A5 and even non-A5 countries, at least in destruction program, some investors might be shy the short term). Thus, ODS destruction projects are to venture into a new project type or ODS owners considered unlikely to overwhelm the voluntary market. with lending capabilities could play an important In addition, it seems highly unlikely that currently role in ensuring that such projects initially get de- veloped. 64 Study on Financing the Destruction of Unwanted ODS TOWARDS A COMPREHENSIVE STRATEGY FOR FINANCING ODS DESTRUCTION THROUGH THE VCM 10.2 Capitalizing on the Existing Montreal ing the Parties’ data reporting under Article 7 of the Protocol Infrastructure Montreal Protocol. Such a clearinghouse could im- prove the ability of A5 countries to participate in the Capitalizing on the existing Montreal Protocol infra- voluntary market by making available information structure can provide additional value and cred- on the country of origin of ODS banks, and thereby ibility for ODS destruction projects. Many of the roles and responsibilities already in place can be assem- bled in the form of a global program for facilitating Second, the Ozone Secretariat could play a role in the ODS destruction process. Table 8 below sum- managing a registry for tracking ODS imports and ex- marizes proposed strategies for improving the op- ports for destruction. This registry system could com- voluntary market, as well as for the entities involved, undertaken for individual projects and allow for the as described in more detail in the remainder of this Montreal Protocol community to keep a closer watch section. In addition to these entities, other Montreal on the movement of ODS from country to country for Protocol stakeholders—such as NGOs and technol- destruction purposes. The information for the registry ogy companies—could be mobilized to raise aware- could be tracked and submitted by the country gov- ness about ODS destruction or provide incentives to ernment focal points in collaboration with national promote the replacement of old ODS-containing trade authorities and could be used as a means to equipment. corroborate project data and offsets recorded in the registries of the relevant standards or programs. Keep- 10.2.1 Ozone Secretariat ing track of the amount of ODS sourced from each In a global program for ODS destruction, the Montre- country for destruction also provides a reality check if, al Protocol Parties may wish to consider expanding for instance, large amounts of ODS seem to coming the role of the Ozone Secretariat in two important from small countries thought to have small banks. As ways. First, as described in more detail in Section 9.5 an added check to the system, this could serve to im- above, the Ozone Secretariat could offer a clear- prove the credibility of the assets and overall market. inghouse-type function for connecting owners of ODS banks with project developers and investors In addition, the Ozone Secretariat, with direction by building on its current responsibilities for manag- provided by the Parties, could potentially coordinate Table 8: Summary of Strategies for Improving the Opportunity for Financing ODS Destruction through the Voluntary Market, and Associated Roles MLF / Ozone Country Implementing Technical Strategies Secretariat Governments Agencies Bodies Develop and manage an international clearinghouse Track ODS imports/exports for destruction Assess taxes on the sale of VERs for ODS management Remove or minimize regulatory, logistical, and technical barriers development Provide technical information that can lend credibility to methodologies FINAL REPORT 65 TOWARDS A COMPREHENSIVE STRATEGY FOR FINANCING ODS DESTRUCTION THROUGH THE VCM with other multilateral environmental agreements— for recovery and collection of ODS will challenge the such as the Basel Convention and Stockholm Con- success of any strategy for promoting ODS destruc- vention—for streamlining or harmonizing require- tion. For example, regulations that prohibit or make ments to facilitate ODS destruction. can limit a country’s capacity to participate in the 10.2.2 Country Governments voluntary market. As a priority, governments should Country governments would have critical roles to seek solutions to these and other barriers to improve play in a global program or approach that facilitates access to the voluntary market. a market for ODS destruction, both as owners of un- 10.2.3 Multilateral Fund and the Implementing Customs) and as facilitators of the ODS destruction Agencies process in their countries. As owners of unwanted The Multilateral Fund and the Implementing Agen- ODS, governments would need to pursue ODS de- cies could also play a role in helping countries to struction projects either on their own or by contract- overcome barriers to ODS destruction—such as ing a private company to undertake the project helping to build infrastructure for ODS recovery or development process. As facilitators, governments training technicians in proper ODS recovery proce- could undertake a number of activities. First, govern- dures—in order to create the enabling environment ments could collect data from the private sector on in A5 countries to manage ODS, which should in existing ODS banks as an input to the clearinghouse turn facilitate participation in ODS disposal projects. managed by the Ozone Secretariat. Second, gov- ernments could track the movement of ODS across should explore options for providing upfront carbon their borders—imports and exports—for the express purpose of destruction, and report this information market and to the extent possible, mainstream ODS to the Ozone Secretariat. Because countries already disposal in waste management investment projects, have experience in auditing and reporting data on as discussed previously. an annual basis, the structure for gathering and re- porting high-quality data is already in place. Main- 10.2.4 Technical Bodies such as TEAP taining information on the amount of ODS shipped Montreal Protocol technical advisory bodies, such for destruction and the destination (or origin) will help as TEAP, are already playing an important role in de- the Montreal Protocol community better understand - the progress toward destroying unwanted ODS. tion through the voluntary market. For example, VCS’ extension of scope refers to the report of the Third, as discussed in more detail in Chapter 9, gov- TEAP Task Force on Destruction Technologies as the ernments could assess a tax on the sale of VERs source for screening criteria for destruction tech- generated by ODS destruction projects, similar to nologies and requirements for DRE. By relying on ex- how the Chinese government levied a tax on the isting analysis and expert input developed by the sale of CERs generated by HFC-23 destruction proj- TEAP, third-party standards and methodologies can ects. The revenue from this taxation could be used help ensure that robust and real emission reductions are achieved through the destruction of ODS. TEAP less cost-effective projects, such as smaller volume and the Technical Options Committees could con- projects or domestic appliance collection projects, tinue to provide such technical input to the process. or for ODS management more generally. Finally, governments have an important role to play 10.3 Strategies to Minimize Costs and in removing or minimizing regulatory, logistical, or Maximize Revenues technical barriers, which exist independent of the - porting ODS for destruction or a lack of infrastructure to developing some ODS destruction projects can 66 Study on Financing the Destruction of Unwanted ODS TOWARDS A COMPREHENSIVE STRATEGY FOR FINANCING ODS DESTRUCTION THROUGH THE VCM be the high cost of project implementation com- or strengthening countries’ climate change and en- bined with large transaction costs, particularly for ergy agendas. low volume projects. Several strategies can be em- ployed to minimize project costs and maximize the Another strategy to minimize project costs is group- revenues earned. ing or pooling projects28 together to minimize trans- action costs and to achieve economies of scale. A critical component of such strategies will be to For example, the VCS allows several projects to be combine ODS destruction projects with other activi- included in a single project description, as long as ties or programs that are also eligible for crediting in the grouped project has a central GHG information the carbon market, such as equipment replacement system and controls associated with the project and its monitoring. CDM methodology AMS0060, carbon credits can be earned for emission reductions associated with re- duced electricity consumption from the use of more 10.4 Gaps Remaining Through Reliance on the Voluntary Market - cient ones could at the same time recover the CFCs As the discussion in Chapter 9 illustrated, while there from the old building chillers and destroy them, and - through the voluntary market, a number of chal- struction credits. Other methodologies, such as the lenges and gaps remain. The following are the main CDM small-scale methodologies AMS III.X and II.C, from household refrigerators and other refrigeration ODS not covered by the voluntary market—al- and AC equipment. Under VCS, which accepts CDM though the Montreal Protocol community is methodologies, such activities could also be com- - bined into one project, thus reducing transaction opment of eligibility criteria and project protocols - for ODS destruction, there is no guarantee that egy can also be highly effective to fund ongoing col- the third-party standards will cover all ODS types lection programs, such as municipal, utility, or retailer in the full range of project circumstances. For ex- programs to collect refrigerators upon disposal, and ample, while the CCX provides credits for halon to ensure that the ODS refrigerant and foam blowing destruction, the Reserve and VCS will not allow agent are destroyed. crediting for halon projects, at least initially. If ha- lons are not widely covered by standards in the ODS destruction activities could also be main- voluntary market, this may limit the opportunity streamed into larger programs and development for halon destruction and represent a gap that projects, such as a comprehensive waste manage- must be addressed through another means. ment program, as discussed above. By combining Countries with low volumes of ODS—Some ODS destruction activities into these broader pro- A5 countries, such as low-volume consuming grams, other components necessary for the suc- countries, may have volumes of ODS that are not cost-effective to collect and destroy, even the voluntary market—might also be incorporated, - such as more generalized technical assistance for tary carbon market. This situation would need to be reviewed on a case-by-case basis, but 28 The rules for grouping projects are dependent on the standard being sought. Under the VCS, a “grouped project� is “a number of projects and their related methodologies included in a single VCS Project Description (VCS PD) at the time of the validation.“ Under CCX, a “pooled project� is “the multiple projects that are represented in CCX by a single Aggrega- FINAL REPORT 67 TOWARDS A COMPREHENSIVE STRATEGY FOR FINANCING ODS DESTRUCTION THROUGH THE VCM represents a possible gap for what the volun- These gaps are important to understand in order to tary market can offer. design an overall strategy for ensuring the recov- - ery and destruction of unwanted ODS since some ity—Some A5 countries may not have the base of these gaps may require other approaches— - beyond reliance on the voluntary market—to fully pate in the voluntary carbon market, especially address ODS banks’ management in an environ- in the early years of such a program. A number mentally sound manner. Given these gaps, a natu- of institutions, such as the World Bank Institute’s ral conclusion might be that the voluntary market Carbon Finance Assist program or UNEP Risoe, cannot serve as the - ODS destruction. That said, using the voluntary car- pacity in developing countries. Some possible a highly successful and cost-effective approach in IFIs as suggested in Chapter 9, exist, but without many cases, and certain strategies can be pursued a strong and concerted effort to address this for improving the opportunity for all Parties to the potential gap, some countries could fall through Montreal Protocol. the cracks. 68 Study on Financing the Destruction of Unwanted ODS References http://www.climateactionreserve.org/how/ . June 29, protocols/adopted/ods/current/ 2009. Climate Action Reserve. 2010b. Article 5 - Brüning, Kristian. 2009. With Gianguido Piani and Lars - Asplund. Scoping paper— - Version 1.0, February 3, 2010. Retrieved March 11, 2010 from: http://www.climateaction . Nordic Environment Finance Cor- reserve.org/how/protocols/adopted/ods/ poration. 2009. current/ CKRC. 2007. Climate Action Reserve. 2009a. . Retrieved from: http://www.ckrc.org/ Retrieved September 2, 2009 from: http://www. myths-and-facts.shtml . Last updated 2007. climateactionreserve.org/wp-content/up- CCX (Chicago Climate Exchange). 2007. Program loads/2009/04/program-manual.pdf. February overview. Available at http://www.chicagocli- 23, 2009. matex.com/content.jsf?id=821. Last updated Climate Action Reserve. 2009b. About Us. Avail- 2007. Accessed September 2, 2009. able at http://www.climateactionreserve.org/ CCX (Chicago Climate Exchange). 2009a. - about-us/. Accessed September 2, 2009. FAO (Food and Agriculture Organization). 2009. . Retrieved September 2, 2009 from: http://www.chicagoclimatex.com/docs/off- August 31, 2009. sets/CCX_General_Offset_Program_Provisions_ Hamilton, Sjardin, Shapiro, Marcello. 2009. Final.pdf. August 20, 2009. CCX (Chicago Climate Exchange). 2009b. Ecosystem Marketplace & New Carbon Finance . Updated Holcim. 2009. - as of August 20, 2009. Retrieved March 11, 2010 - from: http://www.chicagoclimatex.com/docs/ offsets/CCX_ODS_Destruction_Final.pdf Presentation. Un- Climate Action Reserve. 2010a. U.S. dated. Received May 2009. ICF International. 2009. ICF voluntary market survey. Version 1.0, July 2009. February 3, 2010. Retrieved March 11, 2010 from: ICF International. 2008. Voluntary Carbon Outlook. FINAL REPORT 69 REFERENCES IPCC (Intergovernmental Panel on Climate tober 2009. Retrieved from: http://ozone.unep. Change). 2007. org/Assessment_Panels/TEAP/Reports/TEAP_ Contribution of Working Reports/teap-october-2009-decisionXX-7-task- Group I to the Fourth Assessment Report of the force-phase2-report.pdf IPCC. Available online at: http://www.ipcc.ch/ TEAP (Technology and Economic Assessment Panel). ipccreports/ar4-wg1.htm. 2005. Re- IPCC/TEAP. 2005. tried from: http://ozone.unep.org/Assessment_ Panels/TEAP/Reports/TEAP_Reports/teap-sup- Retrieved from: http://www.ipcc.ch/publica- plement-ippc-teap-report-nov2005.pdf tions_and_data/publications_and_data_re- TEAP (Technology and Economic Assessment Pan- ports_safeguarding_the_ozone_layer.htm. el). 2003. Retrieved Multilateral Fund. 2008. from: http://www.unep.ch/ozone/docs/teap- 2003-report.doc - TEAP (Technology and Economic Assessment Panel). Prepared by ICF International for the Mul- 2002. - tilateral Fund of the Montreal Protocol. May . April 2002. Retrieved from: 2008. Retrieved from: http://ozone.unep.org/ http://ozone.unep.org/teap/Reports/Other_ Meeting_Documents/oewg/28oewg/ICF_ Task_Force/TEAP02V3a.pdf Study_on-Unwanted_ODS-E.pdf UNEP (United Nations Environment Programme). Pedersen, Erik. 2007. 2009. - Washington, DC: Presentation on 26 March - 2007. Project Concept Document. 2008. Workshop on management and destruction of ozone-depleting substance banks and implica- Submitted to the tions for climate change. UNEP/OzL.Pro/Work- Chicago Climate Exchange. 2008. shop.3/2/Add.1. July 13, 2009. http://ozone. RAL. Undated. - unep.org/Meeting_Documents/workshop_on_ - ODS_banks/WORKSHOP-3-2-Add1E.pdf UNEP (United Nations Environment Programme). 2006a. Comments and opinion from the RAL Quality Assurance Association for the Demanufacture - of Refrigeration Equipment. 7th Edi- Swedish Environmental Protection Agency. 2009. tion. Retrieved September 2, 2009 from: http:// ozone.unep.org/Publications/MP_Handbook/ July 4, 2009. Section_1_The_Montreal_Protocol/index.shtml. TEAP (Technology and Economic Assessment Pan- 2006. el). 2009a. - UNEP (United Nations Environment Programme). 2006b. June 2009. Retrieved from: http://ozone.unep.org/ - Assessment_Panels/TEAP/Reports/TEAP_Re- - ports/teap-june-2009-decisionXX-7-task-force- Retrieved from: http://www.multilateral report.pdf TEAP (Technology and Economic Assessment Pan- UNEP (United Nations Environment Programme). el). 2009b. 2003. - Oc- . OzL.Pro.15/ 9. Fifteenth 70 Study on Financing the Destruction of Unwanted ODS REFERENCES meeting of the Parties to the Montreal Protocol tember 10, 2009, from: http://epa.gov/ozone/ on Substances that deplete the Ozone Layer. title6/phaseout/ServicingNeedsRevisedDraft Nairobi. November 11, 2003. Retrieved from: Report_June.2008.pdf http://ozone.unep.org/Meeting_Documents/ VCS (Voluntary Carbon Standard). 2010. mop/15mop/15mop-9.e.pdf UNEP (United Nations Environment Programme). Substances. 26 January 2010. 1992. Decision IV/24: Retrieved March 11, 2010 from: http://www.v-c- De- s.org/docs/VCS-Program-Update_Extension-of- cided by the Fourth Meeting of the Parties to Scope-to-Include-ODS.pdf the Montreal Protocol. Retrieved September 11, VCS (Voluntary Carbon Standard). 2008a. 2009 from: http://ozone.unep.org/Publications/ Retrieved September MP_Handbook/Section_2_Decisions/Article_1/ 2, 2009 from: http://www.v-c-s.org/docs/Vol- decs-used_substances/Decision_IV-24.shtml untary%20Carbon%20Standard%202007_1.pdf. U.S. EPA. 2009. November 18, 2008. Included in: Compila- VCS (Voluntary Carbon Standard). 2008b. tion of strategies for the environmentally sound Retrieved September 2, 2009 from: http:// management of banks of ozone-depleting sub- www.v-c-s.org/about.html. stances, UNEP/OzL.Pro/Workshop.3/INF/1. Re- VCS (Voluntary Carbon Standard). 2008c. - trieved from: http://ozone.unep.org/Meeting_ Retrieved September 2, Documents/workshop_on_ODS_banks/ 2009 from: http://www.v-c-s.org/faq.html. WORKSHOP-3-INF1E.pdf World Bank (2009). U.S. EPA. 2008. - May 2009. Retrieved from: http:// Prepared by ICF Inter- the_Carbon_Market_2009-FINAL_26_May09.pdf national for U.S. EPA, June 2008. Retrieved Sep- FINAL REPORT 71 APPENDIX A Case Studies As discussed in this report, stocks of ODS are found in Indonesia: Upgrading a Cement Kiln to Destroy a wide variety of circumstances around the world, ODS facing numerous barriers for their destruction. In or- Argentina: Efforts to Export CTC for Destruction - Russia: Program to Collect and Destroy ODS in lected case studies are presented here to provide Domestic Refrigerated Appliances detailed insight into the project process. A few of Gulf Cooperation Council: Destruction of ODS these case studies illustrate the process for a suc- Earning Carbon Credits under CCX for the De- cessful destruction project, while a few others exem- struction of ODS plify the challenges that ODS destruction projects often encounter. The case studies are presented in the following order: FINAL REPORT 73 APPENDIX A: CASE STUDIES Indonesia: Upgrading a Cement Kiln to Destroy ODS In compliance with its ODS phaseout obligations enactment of multiple production/import bans. In under the Montreal Protocol, in 1998 Indonesia particular, in 1998, Indonesia banned the produc- banned the production and importation of various tion and import of carbon tetrachloride, halon, and ODS. Since that time, a number of ODS have been methyl chloroform. In 2006, the Minister of Trade is- illegally imported into the country and seized by sued Decree No. 24/2006, banning the import of CFCs, R-500, R-502, trichloroethane, and methyl the lack of domestic ODS destruction facilities have bromide (except in quarantine and pre-shipment hindered the disposal of such ODS. As this case applications). In 2007, Indonesia banned the use of study examines, a plan was developed with the all ODS in the manufacture of new products, effec- Japanese Ministry of Environment to adapt an exist- tive July 1, 2008. Indonesian regulations require gov- ing cement kiln in Jakarta, Indonesia to be capable ernment approval for the export of any hazardous of destroying ODS. The facility began destruction wastes, including unwanted ODS; in accordance of ODS in 2007 and has since been used to destroy with the Basel Convention, the recipient country ODS stocks from several commercial clients. must be contacted for approval of the shipment. This case study presents an example of modifying In addition, the import of HCFCs is subject to a an existing destruction facility in an Article 5 coun- try to accommodate ODS destruction. Indonesia’s are required for the import of ODS, which limit the decision to utilize an existing facility in lieu of con- amounts and time periods of import. Shipment must structing a new, dedicated destruction facility was pass through one of six designated entry points in the practical not only in terms of cost, but also given the low volumes of unwanted ODS present in the coun- the contents of ODS imports (55 units were in service try. For other countries, the export of unwanted ODS as of February 2009 with more planned for purchase). to an existing facility in the region may represent a more attractive option. According to Indonesian law, all CFCs, halons, and - stances, and all types of ODS must be “properly 1. Background managed� for their entire lifecycle—although de- struction is not mandated, per se. National law also 1.1 Regulation Over the last decade, Indonesia has taken several and requires that stocks be managed in accor- regulatory actions to phase out ODS, including the dance with hazardous waste laws (e.g., Regulation 85/1999 on hazardous waste management and transport, Regulation 18/2009 on permitting hazard- Export for Destruction: An Example ous waste handlers). Prior to having an Indonesian-based facility capable of destroy- ing ODS, at least one known shipment of unwanted ODS was ex- 1.2 The Need for ODS Destruction Capacity ported from Indonesia to Australia for the purpose of destruction. In accordance with the country’s import ban, Indo- - stocks were recovered by an oil company in Indonesia and sub- mately 177 tonnes of ODS since February 2004, as sequently exported to Australia for destruction. In order to export the ODS, the oil company obtained a permit from the Indonesian shown in Table 9. Of this amount, approximately 79 tonnes of ODS have been re-exported; the remain- of the export plan and received approval. The project costs to- ing 98 tonnes are being stored in customs ware- taled US$520,000, including transport by ship (US$20,000), insur- houses and are available for destruction. These ance (US$220,000), and destruction (US$10.50/kg)—among other costs. HCFC-141b, and are prohibited from use under In- 74 Study on Financing the Destruction of Unwanted ODS APPENDIX A: CASE STUDIES Date of Declared Port of Import Contents Contents Amount Total ODS Status Tanjung Priok, Feb. 11, 2004 R-134a R-12 745 cyl. @ 13.6 kg 10,132 kg Storage Jakarta Tanjung Emas, Mar. 24, 2004 R-22 R-12 2,300 cyl. @ 13.6 kg 31,280 kg Re- Semarang, Central exported Java Province Tanjung Emas, Sept. 3, 2007 R-134a R-12 2,907 cyl. @ 13.6 kg 39,535.2 kg Re- Semarang, Central R-11 100 drums @ 40 kg 4,000 kg exported Java Province R-141 16 drums @ 250 kg 4,000 kg Tanjung Balai, Oct.1, 2007 No R-12 248 cyl. @ 13.6 kg 3,372.8 kg Storage Karimun Island, Riau manifest Islands Province Tanjung Priok, Jakarta Mar. 25, 2009 R-134a R-12 1,140 cyl. @ 13.6 kg 15,504 kg Storage Merak, Banten May 25, 2009 R-134a R-12 3,962 cyl. @ 13.6 kg 53,883 kg Storage Province Pontianak, West Jun 2, 2009 R-134a R-22 1,145 cyl. @ 13.6 kg 15,572 kg Storage Kalimantan Province donesian law. For most seized shipments, import Project developers determined that the more viable declarations, bills of lading, invoices, and/or pack- option was to modify an existing cement kiln such ing lists are available for documentation purposes. that it could destroy ODS as part of its normal opera- tions. Cement kilns are used by the cement indus- Both seized ODS and ODS recovered from retired try to convert limestone into clinker, a precursor to equipment create unwanted stockpiles. As a result, cement. They typically operate at temperatures of there was a desire to develop in-country ODS de- over 1,600°C (CKRC 2007). Because of their high tem- struction capacity. peratures and their need for fuel, cement kilns are co-utilized around the globe for the purposes of haz- ardous waste destruction, including ODS destruction. 2. Project Development However, it is critical to closely monitor the feed rate Figure 13 Holcim Indonesia’s Narogong Plant ODS stockpiles ready for destruction, the Indone- sian Ministry of Environment (KLH) and the Japanese Ministry of Environment (MOE) held a workshop to collaborate on developing a pilot ODS destruction facility (Holcim 2009). Project leaders soon determined that constructing a new, dedicated ODS destruction facility would a viable facility, a steady stream of ODS must be available for destruction, and such volumes were not expected in Indonesia. Holcim 2009 FINAL REPORT 75 APPENDIX A: CASE STUDIES – Engineering work on the damage to the facility (Multilateral Fund 2008). Narogong facility underway In 2005, during the early stages of project develop- completed, and the KLH issued a permit for trial ment, the KLH invited several companies operating runs cement kilns to meet and discuss the possibilities of – Emissions tests were conducted Holcim Indonesia expressed interest in the initiative. – Technical experts from Sumitomo Holcim Indonesia TbK is the country’s third largest ce- Osaka Cement conducted site inspections ment producer, and is part of the multinational Holcim – The KLH issued a permit to begin Group, which has cement operations in 70 countries. ODS destruction at the plant to oversee and operate the facility well. 3. The Technology Holcim Indonesia’s Narogong facility, located in Ja- karta, was the cement kiln selected for the project. At the time of project inception, Holcim’s Narogong The Narogong facility is one of Holcim’s three ce- cement kiln was already a permitted hazardous ment and clinker production sites in Indonesia, and waste destruction facility capable of destroying one of two hazardous waste-permitted destruction polychlorinated biphenyls (PCBs). Thus, to render it facilities owned by Holcim Indonesia. The Narogong capable of destroying ODS, only the addition of an facility in Jakarta was selected for destroying ODS ODS injection system and performance testing were over the other hazardous waste facility (in Cilacap needed (see Figure 14). [Central Java]) due to its proximity to sources of un- wanted ODS in Indonesia. This injection system was installed by Holcim begin- ning in October 2006. The additions consisted of an - ing to the following schedule (Holcim 2009): train, control valves, and piping to the main burner (see Figure 14). – A Memorandum of Understanding was signed between KLH, the Japanese MOE, Tests were conducted to determine the facility’s and Holcim Indonesia performance. CFC-11 was chosen, with 1.5 tonnes – A site study was conducted necessary for conducting the tests over a three-day at Sumitomo Osaka Cement Japan Figure 14 The ODS injection piping (left) and connection into the burner (right) Holcim 2009 76 Study on Financing the Destruction of Unwanted ODS APPENDIX A: CASE STUDIES Figure 15 system; right: emptying a cylinder at the CFC feeding station. Holcim 2009 was determined to exceed 99.9999%. The facility was also found to meet or exceed all national emissions temperature drop. standards for hazardous waste destruction facilities. The kiln has a total feed rate of 550 metric tons per The cost of readying the facility for ODS destruction totaled nearly US$150,000. Approximately US$90,000 of ODS can be fed into the kiln per hour, resulting in a - capacity of 1 tonne of ODS per day. The energy use tion, US$15,000 was used for detail engineering, and for destroying the ODS as part of cement operations US$22,500 was spent on emission testing. Meetings, is negligible, given that ODS destruction represents workshops, training, and travel cost approximately a maximum of 0.01% of the kiln’s input feed on any US$22,500. given day, and that the kiln would operate regard- less of whether ODS is destroyed or not. Indeed, the All types of ODS can be destroyed at the Narogong cement kiln is effectively in constant use, operating facility, although the destruction of halon is not cur- 24 hours a day over 320 days of the year.30 rently permitted.29 The facility has an established procedure to ensure proper ODS destruction and In regards to managing incoming ODS shipments, Holcim has limited storage capacity, so shipment weighed in an ODS station at ground level and - are sent back to their owners after they have been inders are then connected to evacuation tubes, emptied. and the ODS is pumped up several stories and fed into the cement kiln. The cylinders are evacuated until zero pressure is reached. 4. ODS Destruction Activity The kiln operates at temperatures of over 2,000°C, 4.1 ODS Destruction to Date rapidly destroying the ODS. To prevent incomplete To date, the facility has destroyed more than 16 destruction, the injection system is designed to au- tonnes of ODS. The vast majority of this amount 29 While the facility is technically capable of destroying halon, it is not permitted to do so because it was not tested for halon destruction. This is because the destruction test requires 1.5 tonnes of halon, and such quantities are not available within Indonesia (and imports are prohibited). 30 periods. FINAL REPORT 77 APPENDIX A: CASE STUDIES (96%) has been CFC-11, with the remainder being shipment of a 20-foot container containing an es- CFC-12, HCFC-22, and blends. Large shipments of timated nearly 5.5 tonnes of ODS, from Medan in ODS have been sent to the facility in drums, while North Sumatra to Narogong (roughly 2,000 km), smaller shipments have arrived in cans. would cost US$2,000 to US$2,500—or approximately US$0.00018 to US$0.00023/kg/km. This ODS has been shipped for destruction from a variety of commercial sources that have decom- Destruction costs are approximately US$5 per kilo- missioned ODS equipment, namely: (1) Premier Oil, gram, regardless of ODS type. (2) Newmont Nusa Tenggara, (3) Tyco, (4) Kinden, (5) PPLI, (6) Ajinomoto, (7) Kodeco, (8) Star Energy, 4.4 Testing and (9) Magma Nusantara. With the exception of Holcim must renew its permit for ODS destruction on PPLI (a waste collector), all of these companies are - foreign-owned and are believed to be destroying newed permit, Holcim is required under Indonesian ODS in compliance with internal environmental poli- law to conduct testing on the facility every three cies. None of the companies listed have pursued months. Testing must demonstrate compliance with carbon crediting on the voluntary market. limits for the following emissions: particulates, sulfur - 4.2 Verifying ODS Composition chloric acid, carbon monoxide, methane, arsenic, To date, Holcim has relied on company-provided cadmium, chromium, lead, mercury, and thallium. information to determine the types and quanti- ties of ODS received by and destroyed at the fa- In addition, Holcim conducts regular testing under cility. While the Narogong facility is equipped with its own internal Environment Monitoring program. gas chromatography (GC) equipment, there is no This includes testing for emissions that are not cov- ODS standard by which to calibrate it, such that it ered under regulatory tests, such as dioxins. All test- could quantify the exact percentage of ODS (by ing is conducted by an external lab under contract. type) that is received by the facility for destruction. However, because ODS imports are prohibited in 5. Future Outlook quantities of virgin ODS exist in-country,31 an ODS standard cannot readily be developed to calibrate Indonesian customs authorities have approximately the GC. The GC equipment is currently capable of qualitatively identifying the presence of ODS, but However, in some cases, legal proceedings must not the percent mix of gases in a cylinder. be completed before deeming the ODS illegal and thus suitable for destruction. An alternative to using gas chromatography for - Looking ahead, the National Ozone Unit of Indo- nesia anticipates that greater quantities of ODS will become available for destruction. This is because the types and percentages of ODS in a given cyl- inder. that will require destruction. Further, a chiller re- placement project and a new technician training 4.3 Costs program are both expected to result in additional ODS shipping costs vary widely based on volume quantities of unwanted ODS, which could be made and distance. However, Holcim estimates that the available for destruction. 31 78 Study on Financing the Destruction of Unwanted ODS APPENDIX A: CASE STUDIES Argentina: Efforts to Export CTC for Destruction This case study examines the efforts of an Argentine 1.2 Regulatory Background chemical company, Frío Industrias Argentinas, SA Production of ODS in Argentina has historically been (FIASA), which sought to export and destroy a large limited, with refrigerant companies producing only stockpile of carbon tetrachloride (CTC) for carbon three types of substances: CFC-11, CFC-12, and credits. In order to pursue carbon credits on the Chi- HCFC-22. As part of the country’s ODS phaseout cago Climate Exchange, FIASA attempted to ex- strategy, new companies intending to produce port the unwanted CTC stocks to the United States ODS were banned from establishing operations in for destruction. Argentina starting in 2003. In addition, ODS imports are tightly controlled. An import and export licens- This case study illustrates some of the logistical hur- ing system was implemented in 2004, under which all planned imports and exports of ODS must re- the export of ODS for destruction. The project also ceive prior authorization from the Ministry of Envi- explores the effect of the voluntary market’s trading price of carbon on the viability of ODS destruction Ozone (OPROZ). A national ODS registry is used to projects, and highlights the importance of reducing monitor all imports and exports, with all records on- logistical and regulatory impediments that effec- line and accessible to the public. To enforce these tively prevent ODS destruction projects from taking import regulations, OPROZ provided training to Cus- shape. ODS to date. In addition, OPROZ does not authorize 1. Background ODS management regulations. 1.1 Origins of ODS Stocks FIASA is primarily a manufacturer and distributor of In regards to unwanted stocks, Argentinean law - holds the owner of the ODS responsible for its proper eration and air conditioning equipment. In 2007, the company imported approximately 355 tonnes for destruction, since used ODS is in demand for ser- of CTC (426 ODP-weighted tonnes) into Argentina vicing needs. from Brazil and Spain, intended for use as a feed- stock for CFC-11 and CFC-12 production. However, 1.3 Capacity for ODS Destruction demand for CFCs rapidly decreased in Argentina Argentina does not have domestic facilities ca- and worldwide, and the Multilateral Fund worked in pable of destroying ODS. Efforts are underway to partnership with FIASA to phase out its production import equipment from Japan for the small-scale of CFC, with US$8.3 million approved for production destruction of CFCs. Small-scale destruction ca- closure, compensation, and technical assistance pacity may be best suited to Argentina’s needs, (Executive Committee of the Multilateral Fund since there are no known large stockpiles of un- 2007). Due to the limited demand for feedstock in wanted ODS in the country. No ODS is known to the rest of Argentina and across Article 5 producing have been destroyed in the past in Argentina, nor has any ODS been shipped to another country for for the surplus CTC. As a result, the CTC feedstock destruction. was deemed unwanted. FIASA considered its op- tions for the unwanted stocks of CTC, and initially determined that it should be disposed of in a safe 2. Project Development and environmentally sound manner (Project Con- cept Document 2008). In determining what to do with the unwanted CTC, FIASA considered the following four potential options: FINAL REPORT 79 APPENDIX A: CASE STUDIES Domestic use or export for laboratory applica- imports for the purpose of destruction (but not use), tions; no legal barriers were at play. Export for use in Article 5 countries, a use that is not controlled by the Montreal Protocol A timeframe of six months was expected for the Permanent storage in Argentina. This option project, from the time a transportation carrier was poses the risk of leaking to the atmosphere, as retained to the time of receiving CCX credits. Total well as the risk of illegal diversion to CFC produc- emissions avoided were estimated to be 489,417 tion in future years if not monitored; or tCO2e, and the CCX credits to be received (after the Destruction in Argentina or in another country. 25% discounting) were estimated at 367,057 tCO2e. During project development, FIASA learned from the World Bank that it would need to complete an 3. Outcome audit of its phaseout commitment and also remove its CTC stockpile from Argentina, in order to receive Carbon offset credit prices on CCX are subject to the remaining phaseout assistance funding. FIASA felt that this narrowed its options for the CTC stock- of project development, the price of CCX credits pile to destruction, either in Argentina or in another reached historically low levels. As a result, the rev- country, or export. enue that FIASA could have received from the sale Having considered these options, FIASA deter- initially expected. Project costs would have thus like- mined that the best choice was export for destruc- ly exceeded the potential revenue. tion to the United States, since this would allow the company to register the project for carbon offset For example, the destruction of 355 tonnes of ODS, credits on the CCX—which required that destruc- at a cost of US$5/kilogram, would have cost US$1.78 tion take place at a permitted destruction facility million, not including the costs of transportation, within the U.S. - tion. The destruction project would have resulted Per CCX requirements, FIASA made arrangements in carbon offset credits of approximately 367,000 to ensure that the destruction within the U.S. would tCO2e (accounting for CCX’s 25% discount factor, take place at a facility meeting all U.S. legal require- which existed in the project protocol at the time ments. To this end, FIASA made preliminary contacts that FIASA was considering pursuing this project). At with a number of U.S.-based destruction compa- a carbon credit price of $0.25/tCO2e, the price in CCX as of early September 2009, this would have and Veolia—in order to develop a destruction plan. brought FIASA only about US$91,800 in revenue. All four companies had the facilities needed to de- stroy CTC at the CCX-required 99.99% DRE. FIASA As a result, the destruction of ODS and subsequent also approached the World Bank for guidance to sale of CCX credits was not pursued. Instead, the help facilitate the process, as well as Air Compliance CTC was exported to Brazil and Mexico for use as a the proposed project. Because the U.S. allows ODS 80 Study on Financing the Destruction of Unwanted ODS APPENDIX A: CASE STUDIES Russia: Program to Collect and Destroy ODS in Domestic Refrigerators To assess the potential for ODS recovery and de- tors in countries that lack in-country infrastructure, struction from ODS banks in Russia, the Nordic En- as well as to provide practical experience for other vironmental Financing Corporation (NEFCO) is potential project proponents, and to generate dia- planning a pilot project in Moscow. Under the pilot logue among stakeholders on the project process. project, disposed household refrigerators will be col- The project developers also seek to gain experience lected and shipped to a demanufacturing facility in in developing an ODS destruction project that is ap- Finland, and ODS from both the refrigeration circuit proved through the voluntary carbon market, per and the insulating foam will be recovered and de- an existing emissions reduction project methodol- stroyed. ogy for ODS destruction projects. This case study examines the planning and devel- Should NEFCO succeed in implementing the proj- opment of this pilot project. Lessons learned from ect, it will demonstrate the feasibility of collecting this experience can be applied to projects in other and handling old equipment and hazardous waste, countries that lack in-country infrastructure for safely which will further international dialogue related managing household refrigerators at end-of-life. to the development of an integrated strategy for waste management, including ODS (Swedish Envi- ronmental Protection Agency 2009). Indeed, Rus- 1. Background sia is currently in the process of developing a waste electronic and electric equipment strategy, using 1.1 Project Development the European Union’s legislation as a model; the NEFCO has undertaken an initiative to create an ODS success of a waste appliance collection and recov- management system that will recover and destroy ery project can effectively support national efforts unwanted ODS in Russia. NEFCO’s long-term strategy to implement a more comprehensive waste man- agement regulation. Current regulations in Russia enterprises that can recover and destroy ODS stocks require only the recovery of ODS contained in cer- in Russia both cost-effectively and in accordance tain commercial refrigeration/air conditioning units with the highest environmental standards. Currently, (see text box). however, no regulations or incentives exist in Russia to promote the collection and proper disposal of Current ODS Collection Efforts in Russia household refrigerators at end-of-life. Moreover, no Russia has regulatory requirements in place to collect refrigerant appliance demanufacturing facilities exist within Rus- from large refrigeration/air conditioning units at hotels, grocery sia to process such equipment (Brüning 2009). stores, and restaurants. During the maintenance of ODS-based units at these sites, refrigeration technicians are prohibited from venting the ODS and thus must recover it. Old CFC at such estab- ODS destruction pilot project with technical and lishments must be replaced with alternative refrigerants, although there is no requirement for destroying the recovered ODS. As a result, Russia has an established network of technicians that are Protection Agency and the Finnish Ministry of Envi- well-trained in refrigeration technology and maintenance, which - may be potentially useful for future ODS destruction/replace- erators from households in Russia and export them ment projects. to Finland for metal recycling and recovery/de- struction of ODS refrigerants and foams. The intent is 1.2 Scope and Emissions Reductions project (Brüning 2009). The NEFCO pilot project aims to collect approxi- mately 10,000 retired refrigerators in the greater Through this project, developers seek to shed light Moscow area. Assuming each refrigerator contains on the feasibility of managing end-of-life refrigera- a total of 500 grams of ODS refrigerant and foam, FINAL REPORT 81 APPENDIX A: CASE STUDIES 5 tonnes of ODS will be recovered, leading to emis- ated from each unit and fed directly into the incin- sion reductions of roughly 35,000 tCO2e (Brüning erator. The refrigerators are then manually broken 2009). This preliminary estimate is based on the as- down into metal components and plastics; the met- sumption that CFC-11 will comprise approximately als are recycled and the plastics are incinerated. two-thirds of the ODS recovered from the units, while The cabinet, or refrigerator frame, is then crushed CFC-12 will represent the remaining one-third. in an airtight crushing chamber to release ODS from the foam, which is then siphoned directly to the in- 1.3 Carbon Financing cinerator. Currently, there is no measurement of the Project developers are using the EOS Climate removed ODS refrigerant or blowing agent prior to methodology to structure the project design and incineration. required project documentation. The project devel- opers may partner with the methodology develop- ers in using the project for supporting methodology 3. Challenges Anticipated validation, if needed. Developers eventually plan to register the project with a third-party voluntary car- As this pilot project readies for implementation, a bon standard, such as the VCS. It is envisioned that number of challenges are foreseen. First, the trans- the project will meet the requirements of a soon- port of end-of-life units across international borders to-be accepted methodology, such that no addi- may pose an obstacle. The refrigerators must be tional time or cost will be required to develop and submit a new ODS destruction project methodology for cross-border shipment under the Basel and Rot- for approval under a given standard. terdam Conventions, which may trigger a variety of administrative hurdles. In addition, Russian authori- ties may have to provide permits for the export of 2. Project Design the refrigerators (Brüning 2009, Swedish Environmen- tal Protection Agency 2009). The collection of refrigerators will be managed by a Russian subsidiary of a Nordic manufacturer and In addition, the refrigerant and blowing agent recov- selected local retailers. The program will likely be in the form of an appliance swap system, with retail- (for type of ODS) nor measured at the demanufac- ers collecting old refrigerators at the time new units turing facility. This is because there has not previously are delivered. The collected refrigerators will then be stored in a central logistical facility in the greater - Moscow area. cation purposes will need to be developed to meet the requirements of any future approved methodol- Currently, trucks are used to deliver new refrigera- ogy. One option for conducting such measurement tors from Finland to Russia, and many of the trucks is to use a material balance formula; under this ap- currently return empty to Finland. This pilot project proach, the weight of the unit would be measured seeks to utilize this idle capacity to ship the end-of- before and after crushing (taking into account the life refrigerators to Finland. The refrigerators will be air volume in the crushing chamber). However, shipped as whole units, without prior disassembly or based on a preliminary assessment, the cost and refrigerant/foam evacuation in Russia. technical challenges associated with this approach Once transported to Finland, the refrigerators will be discussion with methodology experts to understand disassembled at a facility that currently disposes a large number of refrigerators annually for Finnish re- means of measurement. tailers and can easily accommodate an additional 10,000 units from Russia (Brüning 2009). During the Other challenges include timing the project in re- demanufacturing process, the refrigerant is evacu- gards to the cyclic nature of collecting and ship- 82 Study on Financing the Destruction of Unwanted ODS APPENDIX A: CASE STUDIES ping units at different times of the year (e.g., the demanufacturing facility, and relevant govern- ease of transport during the summer versus the ment authorities) is critical, but can also pose - challenges. The process for overcoming these cy of the destruction plant. In addition, coordi- challenges will be thoroughly documented in nation among the diverse stakeholders involved order to guide future projects and maximize ef- in the process (e.g., NEFCO, Russian retailers, the FINAL REPORT 83 APPENDIX A: CASE STUDIES Gulf Cooperation Council: Destruction of ODS The Gulf Cooperation Council (GCC; also known Figure 16 ODS stockpile stored in cylinders as the Cooperation Council for the Arab States of the Gulf) is a regional cooperative group con- sisting of the countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. As part of its ODS phaseout program, the GCC prohibits the import or export of ODS. However, no regulatory mandate for the destruction of un- wanted ODS has been implemented. To help facilitate destruction in the region, RemTec Interna- tional, a U.S. company specailizing in the manage- ment of hazardous waste, and Pan Gulf Industrial Systems, a Saudi Arabian company specializing are planning to collaborate on the Pan Gulf ODS Destruction Project to recover, consolidate, and destroy ODS at a dedicated plasma arc facil- (see Figure 16) or vented. the project, it is intended that carbon credits 1.2 Existing Banks of Unwanted ODS will be generated under a validated Climate In addition to the absence of a regulatory man- Action Reserve or Voluntary Carbon Standard date to destroy unwanted ODS and the current methodology. ban on ODS export for the purpose of destruction, there is very little capacity or expertise in the region Thus, this case study presents a look at the ongo- for ODS destruction. As a result, common practice ing planning and development of an ODS destruc- in the industrial sector is to store surplus/used ODS tion project intended to be funded in part by the - sale of carbon offset credits. In addition, this case come available. According to project developers, study provides an example of regional coopera- inventoried ODS banks in the region, including both tion on ODS destruction initiatives, with a central refrigerant stored in containers and that installed in facility being used to meet the needs of several obsolete equipment, total 2,627 tonnes (see Table countries. 10). Detailed inventories for most of these stock- piles, including the original sources of the material, have been provided to the project proponents, 1. Background with the intention of facilitating the carbon credit- ing process. 1.1 Regulation In accordance with the Montreal Protocol, GCC member countries are working to phase out ODS. To meet their phaseout obligations, the GCC coun- Region tries prohibit the export of used or surplus ODS, ODS Type Amount (tonnes) Location with no execption for destruction. In addition, the import of ODS from countries not in the GCC is CFC-12 1,000 Saudi Arabia prohibited. CFC-11 1,000 Saudi Arabia Halon 1301 360 Kuwait Currently, there is no regulatory mandate in place in the GCC for the destruction of unwanted ODS. Halon 1301 267 Saudi Arabia 84 Study on Financing the Destruction of Unwanted ODS APPENDIX A: CASE STUDIES 2. Project Development Table 11: Estimated ODS Banks in Equipment in the Gulf Region 2.1 Project Proponents Estimated In order to address the need for ODS destruction Volume Type of ODS Type (tonnes) Location Equipment within the GCC, RemTec International, a halocarbon specialist headquarted in Ohio, USA, in collaboration CFC-12 500 Saudi Chillers with Pan Gulf Industrial Systems, headquartered in Arabia Al-Khobar, Kingdom of Saudia Arabia is developing CFC-11 500 Saudi Chillers a project to recover and store or destroy ODS from Arabia GCC member countries. Known as the Halon 1301 250 UAE Fire Systems at its core is the proposed con- CFC-11 150 UAE Chillers struction and operation of a Halocarbon Plant in the eastern province of Saudi Arabia. The proposed facil- will be designed with state-of-the-art technology for Further, an estimated 1,400 tonnes of additional ODS halocarbon handling, reclamation, and disposal. are installed in equipment still in operation within the GCC, as detailed in Table 11. The inventoried banks RemTec will develop the facility and then operate listed in these two tables consist primarily of ODS it jointly with Pan Gulf Industrial Systems. The project owner is registered as a joint venture between Pan chillers, and do not include ODS banks installed in Gulf Holdings and RemTec International. The project domestic appliances. In addition, ODS banks have is currently under approval by the relevant govern- not been inventoried for all GCC member countries, ment bodies in Saudi Arabia. so more ODS installations and stockpiles likely exist in the region. Once the facility is up and running, a certain amount of the recovered ODS will be decanted into storage 1.3 Existing Facilities vessels and reclaimed and stored in a dedicated Current capacity for destroying these ODS stocks storage facility for future critical use needs, while the within the region is very limited. One incineration rest will be targeted for destruction. The project de- facility, Bee A’h, located in Jubail, Saudi Arabia, velopers intend to register the destruction of ODS for is designed to destroy petrochemical sludge and carbon credits under the Reserve or VCS and gen- waste. The facility has processed a small amount of erate funds from the sale of carbon offsets. It is envi- sioned that the project will be privately funded with of ODS is highly limited as it is not designed to han- project costs re-paid in part or in full through earned carbon offset credits. that are produced during ODS destruction. These acids can easily damage incineration facilities 2.2 The Facility The proposed Pan Gulf Halocarbon Plant will feature such byproducts. The focus of the disposal at Bee a PLASCON® argon plasma arc for ODS destruction A’h is petrochemical sludge and waste streams. (see Figure 17). This technology has been approved by TEAP and has been shown to destroy ODS with a it could handle larger volumes of ODS was deter- 99.9999% DRE. It is used for large-scale ODS destruc- mined not to be a cost-effective option. As export to a country outside of the GCC is currently prohib- and in the U.S. Project developers expect the ca- ited, the only viable option for ODS disposal within pacity of a single PLASCON® plasma arc destruc- the current legal framework is to construct a new tion system to be 500 MT of ODS per year and to facility. be scalable with additonal PLASCON® units. The FINAL REPORT 85 APPENDIX A: CASE STUDIES Figure 17 A PLASCON® plasma arc destruction Figure 18 One of RemTec’s multimodal shipping unit tanks, used for shipping refrigerant by rail, ship, or truck system will accept a 100% ODS waste stream feed. The facility will also be designed to allow for one to two additional plasma arc destruction systems if fur- gin by the end of 2010 or early 2011, depending on ther capacity is needed in the future. the timing of the Reserve or VCS application and subsequent approval (excluding halon). Few chal- In order to ensure safe operations and minimize ex- lenges are expected in construction and operation, haust emissions, the plasma arc destruction system since Pan Gulf has extensive experience with the will be monitored by a computer control system, operation of industrial facilities in the region. - kalinity being continuously monitored and recorded. Per the import ban, only ODS recovered in the GCC will be destroyed, and few challenges are expected tested to ensure thoroughness of destruction and, in transporting ODS from these member countries into Saudi Arabia. Given the inventory of stocks in chromotography readings for individual batches of the Gulf region, project developers are anticipating ODS fed into the unit. The PLASCON® arc will be test- that 600 to 1,000 tonnes of ODS will be decommis- ed at least once a year, following the initial full vali- sioned, stored, and reclaimed or destroyed each dation, to ensure that TEAP standards are being met. - The facility will be directly managed by RemTec Inter- pacity of the the destruction facility is expected to national, which will provide training to the local staff. be 650 to 1,000 tonnes per year, the facility will likely be able to handle the vast majority of the destruc- In addition, the facility’s location will allow for both tion needs of the region. In the future, additional fa- port and rail connections for easy access to ODS cilities could be built in the United Arab Emirates or shipment from other GCC countries (see Figure 18). Kuwait, as needed. In the future, the facility will be Consolidation, testing and weighing of the received able to handle HCFCs and HFCs, as these materials shipments of ODS will take place at the facility. 3.2 Meeting the Criteria for Carbon Offset 3. Expected Outcomes Credits Since project developers are planning on destroy- 3.1 Operations - Following planning and construction, it is expected ter for carbon offset credits with the Reserve or VCS. that operation of the new destruction facility will be- It is anticipated that the project wll be developed 86 Study on Financing the Destruction of Unwanted ODS APPENDIX A: CASE STUDIES using the Reserve’s ODS destruction protocol or a methodology validated under VCS. Accordingly, all provided to show that no other form of environmen- project details are expected to be in compliance tal credit was generated by this project. with the Reserve or VCS’ criteria. 3.3 In particular, only ODS that are eligible for carbon It is expected that all necessary data for registering credits will be destroyed, including all refrigerant carbon offsets under the Reserve or VCS will easily gases that have been phased out under the Mon- be obtained, given the precautions taken to care- treal Protocol. Other ODS will be stored until such a fully measure and verify activities throughout the time as those materials would be eligible under the project pathway. For example, during the destruc- Reserve, VCS, or other protocol. tion process, the quantity of ODS being destroyed - When applying for project approval through the by gas chromatography and mass spectrometry, obtained to certify that current regulations do not while data on the destruction process itself, such as require ODS destruction—i.e., that all ODS destruc- arc temperature, will be provided by the comput- tion performed at the facility is indeed additional, erized measurement devices associated with the and that all ODS would have been eventually modular PLASCON® unit. leaked to the atmosphere in the absence of the project. This is an appropriate baseline scenario, as Process emissions from destruction will be the result there is currently no incentive in the GCC for de- of electricity usage, as no fossil fuels are used by the stroying ODS. plasma arc. - Leakage is expected to be zero, as there is no trans- cludes the GPS location of the destruction and a - date/time code will be used to help ensure that de- solidation, which will take place at the destruction struction for another emissions reduction project is facility. FINAL REPORT 87 APPENDIX A: CASE STUDIES Earning Carbon Credits under CCX for the Destruction of ODS An international chemical company’s (hereafter, 2. Project Development Company) successful destruction of refrigerant stocks, collected from clients and in-house facilities, 2.1 The Destruction Process - Once the decision was made to destroy the ODS der the Chicago Climate Exchange (CCX). Compa- per the CCX methodology, Company registered ny earned CCX Carbon Financial Instrument (CFI) the project with CCX to obtain approval that the credits by using the approved CCX ODS destruction project would be valid under the criteria outlined in CCX’s ODS Destruction Project Guidelines. Com- company. Credits for Phase I of this project were pany then interviewed several approved third-party issued in October 2008. Company’s overall project - entailed the destruction of 18,867 kg of mixed refrig- pliance Testing, Inc. (ACT). erant, including CFCs, HCFCs, HFCs, and hydrocar- bons. CFIs were received for only the eligible CFC Once the preliminary approval was obtained, Com- portion of the mixture, but all of the materials were pany’s team proceeded to follow the CCX protocol and destroy the stocks; destruction took place in two phases since the material resided at two facili- This case study provides insight into how an ODS de- ties. At each of these two locations, mixed refriger- struction methodology can be followed to convert ant was consolidated and transported separately to a destruction facility. Phase 1 contained 8,806 kg credits. In addition, the role of Company, an inter- of mixed refrigerants, of which 5,725 kg were CFCs. national company with the ability to undertake such Phase II contained 10,062 kg of mixed refrigerants; projects utilizing best practices, provides a template of which 4,432 kilograms were CFCs. Thus, between on how to undertake ODS destruction projects in an the two phases, a total of 18,867 kg of mixed refrig- environmentally-sound manner. erants were sent for destruction. All mixed refriger- ants and ODS were destroyed in 2008. 1. Background 2.2 Collection and Consolidation The mixed refrigerant (including CFCs) was collect- Company, a multinational chemical company, op- ed from in-house facilities and customer sites (the erates a buyback program for its refrigerant custom- buyback partners) in a variety of container sizes, ers, wherein they offer a market-competitive price with all shipments received at the Company facil- for the return of recovered refrigerants, including un- ity or at its reclaim and packaging facilities. Each wanted ODS. As a result of this buyback program, as incoming shipment was tested to determine volume well as through the collection of ODS from its internal and content by chemical type. After testing, the operations, Company was in possession of 18,867 kg ODS was consolidated into 1 MT tanks. of mixed refrigerant. The stocks comprised four types 2.3 Destruction 2-butene. The 1 MT tanks of refrigerant were then readied for shipment to a destruction facility. Fourteen tanks Company decided to pilot an effort to destroy these were used in the Phase I shipment, either partly or stocks and pursue voluntary carbon offset credits completely full. A manifest of the tank contents was under the CCX for the destruction of the eligible developed using gas chromatography and was at- portion of the recovered refrigerant volume (i.e., the tached to the shipment. CFC portion). Through this project, Company sought to promote the responsible use and disposal of re- For Phase I, Company then sent the tanks by truck to frigerants in the industry. a permitted hazardous waste incinerator operated 88 Study on Financing the Destruction of Unwanted ODS APPENDIX A: CASE STUDIES Figure 19 Rotary Kiln at Clean Harbors’ Facility Table 12: Costs for the Destruction of Unwanted ODS Cost per Kilogram Process (in US$) Buyback (reference case: $22.05 CFC-12) Collection and transfer $2.20 Consolidation $2.20 Transportation $2.88 Purity analysis $0.11 $0.42 Destruction $5.51 Other (initial feasibility $0.80 assessment, project documents, by Clean Harbors, Inc. and located in El Dorado, validation and registration Arkansas. The destruction facility is used for the dis- process, CFI offset rate) posal of various hazardous wastes, using two rotary Total $36.18 kilns (see Figure 19) (Clean Harbors 2009). In rotary and limited to prevent damage to the facility from undertaken. Approximate project costs for collec- - After destruction was complete, Company estimat- struction are described in Table 12, with a total cost ed that the ODS losses incurred during the whole rate of US$36.18/kg for the 18,867 kg destroyed by project, from collection, consolidation, transporta- Company. tion, and destruction, amounted to 1.5 to 2% of the original amount collected from customers. 2.6 Voluntary Carbon Credits With Phase I and II completed, Company’s next 2.4 step was to register carbon reduction credits with For both the Phase I and Phase II projects, Com- the CCX. A 25% discount was applied to the emis- pany enlisted the services of an approved CCX sions reductions, per CCX’s calculation methodol- independently calculated the quantity of ODS de- the project from the consolidation point through stroyed and corresponding CFIs utilizing the Com- transport and destruction by Clean Harbors, and pany tank weight sheets and gas chromatography undertook analysis of emissions data from destruc- analysis. ACT calculations were utilized in cases of tion, known as a Stack Emissions Monitoring Systems data discrepancies. All calculations were checked (SEMS) report. ACT also documented the purity of for data reduction errors. Once the third party the materials destroyed. After completing this pro- by CCX, vintage 2008 CFIs were posted to Com- provided to Company and CCX. pany CCX Registry account related to Phase I of the Ozone Depleting Substance Destruction offset 2.5 Costs project submission. Phase II supporting documents Based on the experience of both the Phase I and - Phase II projects, an assessment of project costs was FINAL REPORT 89 APPENDIX A: CASE STUDIES 3. Lessons Learned In addition, Company’s extensive recordkeeping procedures facilitated a relatively straightforward The Company’s experience in destroying bulk quan- tities of unwanted ODS for credits through CCX can CCX. provide important guidance for other potential proj- ect proponents. First, the use of a buyback program Furthermore, the project indicated how the value is an effective way to recover ODS from commer- of carbon offsets is an important consideration in cial and industrial users; it is also a good example the project feasibility assessment. As the value of of leadership in producer responsibility. Such a the carbon credits decreases, as it has recently with program allows for ODS consolidation and creates CCX, the incentive to take on a project decreas- economies of scale whereby the costs of ODS col- es, since pursuing the gathering and destruction of lection, transport, and destruction are minimized, as ODS would incur a cost with nearly no opportunity are administrative project costs. to offset the costs. 90 Study on Financing the Destruction of Unwanted ODS APPENDIX B Terms of Reference for the Study Elements of Terms of Reference Future Requirements for the Collection and Disposi- for a Study on Financing the Destruction tion of Non-Reusable and Unwanted ODS in Article of Unwanted ODS 5 countries� on 13–15 March 2006, and there have been a series of regional consultations held on dif- Purpose ferent aspects of disposal and destruction issues Both developed and developing countries have involving Article 5 countries, the Secretariat, and or are in the process of eliminating the production bilateral and implementing agencies. A study for and consumption of the most potent ozone deplet- effective options to manage unwanted ODS was ing substances (ODS) that fall under the control of commissioned by the MLF and the draft report was presented at the 54th Meeting of the MLF Executive of ODS consumption—import plus production minus Committee. The MLF Executive Committee has con- export—means that the Protocol does not control sequently endorsed a proposal by the World Bank ODS existing in stockpiles and banks in countries to conduct a study on how to develop a strategy (whether it be in equipment or cylinders). This in- to obtain funding through voluntary carbon markets cludes unwanted ODS that no longer can be recov- for destruction of unwanted ODS, which would also ered or used. - cation of ODS disposal. As the complete phaseout date for Annex A and B chemicals is approaching, an increasing number Background of CFC equipment and products are being decom- Article 5 countries are currently in the compliance missioned. ODS from these outdated products, if left period of the Montreal Protocol and are expected unmanaged, could place an increasing threat to to completely phase out the production and con- the ozone layer protection. Since these chemicals sumption of CFCs, halons and CTC by 2010. As these also have high Global Warming Potential (GWP) in countries advance in implementation of MP obli- comparison with carbon dioxide, it is a concomitant gations, they are increasingly faced with the real- threat to the climate. In responding to this threat, ity long understood in non-Article 5 countries—that the Parties to the Montreal Protocol and the MLF banks of ODS will have accumulated and continue have in the recent years increased their efforts to to exist, posing an ongoing threat to the environ- prevent releases of these unwanted ODS to the at- ment. This is particularly the case for ODS that can- mosphere. The MLF Secretariat convened an “Ex- not be recovered nor reclaimed either for technical perts Meeting to Assess the Extent of Current and reasons or in a cost-effective manner. FINAL REPORT 91 APPENDIX B:TERMS OF REFERENCE FOR THE STUDY Unwanted ODS and the need for destruction ca- Some markets closely mirror the standards of com- pacity or choices has consequently become an pliance markets, while others adopted less stringent increased subject of debate in meetings of the Parties and the MLF Executive Committee. Both the administrative burden, the transaction costs bodies commissioned the development of terms and enable the generation of as many credits as of references for studies on environmentally sound possible on the market. These comparative studies destruction of ODS. In 2006, the Parties requested the Executive Committee to conduct one study on markets actually, or potentially, address GHGs that the collection and treatment of unwanted ODS in are not directly controlled by Kyoto. In particular, both Article 5 and non-Article 5 countries. This study there is a need to look at elements such as the proj- ect cycles, the rules for acceptability of new project ended Working Group Meeting. types and new methodologies approval, the coun- tries eligible for offset projects to determine how the The environmental risks of emissive uses of ODS ex- special issues/requirements surrounding ODS and tend beyond the ozone layer. At the 19th Meeting of the Montreal Protocol can be incorporated on the the Parties, in September 2007, the Parties adopted one hand, and on the other, what considerations a decision that acknowledges the direct link be- countries must take into account when exploring tween ODS and adverse effects on the climate. In particular, the Parties asked that the MLF give prior- such as CCX. ity to projects that focused on alternatives that mini- mized other impacts to the environment, including Objectives on the climate. At its 54th Meeting, the Executive Committee en- dorsed a proposal in the World Bank’s 2008-2010 Thus, alongside the increasing calls from Article 5 Business Plan to conduct a study on ODS destruc- countries for assistance to manage their unwant- tion. According to the proposal, the Bank plans to ed ODS accumulating in equipment, ports, recla- 1) describe opportunities for funding through vol- mation centers, etc., the Implementing Agencies untary carbon markets for destruction of unwanted have been considering innovative approaches to ODS and which would 2) include a methodology for - mate change regime. Voluntary carbon markets ODS destruction as they are not bound to compli- As per Decision 54/10(d) these Terms of Refer- ance markets and because ODS, that can have ex- ence are being developed in collaboration with tremely high GWPs would be an attractive source Executive Committee members, the MLF Imple- of emission reduction credits. To date, only one mar- menting Agencies and the World Bank. ket exists that issues credits for ODS destruction, the Chicago Climate Exchange (CCX); however, other Scope of Work markets such as those adopted by the Voluntary The study will approach voluntary carbon market Carbon Standard 2007 (VCS) are not necessarily opportunities from a concrete, simple, and work- restricted to the six (6) Kyoto gases and therefore - could potentially become markets for destruction hicle. The study should elaborate on the structure of unwanted ODS if a methodology was proposed and operational procedures for proposed unwant- and approved. ed ODS disposal projects that maximize the amount of ODS destroyed. Comparative analyses on the voluntary markets report that over the last few years, about a dozen The Consultant will be responsible for 1) researching of voluntary markets have been developed, each presenting different standards and focus areas. or strategies for companies of Article 5 countries to 92 Study on Financing the Destruction of Unwanted ODS APPENDIX B:TERMS OF REFERENCE FOR THE STUDY access funding through voluntary carbon markets and for 2) proposing corresponding disposal meth- Examine (comparative analysis) the Clean De- odologies, based on best practice from existing velopment Mechanism (CDM) and possibly approaches and illustrated through case studies Joint Implementation (JI), the rules sets in various (where applicable). voluntary markets (existing and under develop- ment), including any market to date that has In order to inform this work, the Study should include ODS destruction projects in its portfolio of emis- a short and concise analyses on voluntary carbon sion reduction projects, with a view to determin- markets, rules of voluntary markets and other car- ing and comparing: bon markets, as well as dedicated work on ODS Market scope, volume, share, growth destruction (options, costs, assessment of the scale/ Management structure and stakeholders existing banks). See Annex I for a list of minimum Transaction cost ($ per t CO2e), price of offsets works to draw from. The Study will include elements Transaction units that are expected to be validated including opera- Type/ categories of projects eligible Restricted or not to the Kyoto gases CCX). The Study will explore, in consultation with Project cycle and actors involved at each stakeholders, NOUs in key Article 5 countries, addi- steps tional opportunities to launch pilot projects in other Average time required before the genera- Article 5 countries. tion of credits - Some of the consultations with NOUs in Article 5 tion/ validation mechanisms, frequency, countries will be done during the UNEP Ozone Net- third party review requirements work Regional meetings in order to maximize the Transparency of the system (e.g. on ele- number of stakeholders consulted and feedback ments such as the decision making process, received on the study. This will require one consul- transactions, etc.) tant to travel for 2-4 days to regional workshops in Process for the approval of project activity - Countries eligible for offset projects tween April and May 2009. In addition, the Consul- Rules for new methodology approval th Executive Committee Meeting in Sharm el Sheikh for adapting methodologies/approaches (tentatively late October 2009). and for introducing new project types Additionality requirements and/or criteria Elements of the Study used to demonstrated that the project ac- Develop and/or adopt a select number of emis- tivity is not the baseline, including the use of sion reduction methodologies to be used for the investment analyses, barriers analyses, sec- disposal of unwanted ODS; toral benchmarks Utilize practical experiences from existing and/ Registry of emissions and/or control process- or planned ODS emission reduction projects in es put in place to avoid double counting of Article 5 and non-Article 5 countries in shaping emission reduction. the design of the strategy and methodologies; Impact of supply of unwanted ODS (as de- Generate robust, transparent and homoge- termined by projecting future volumes and neous emission reductions from disposal of un- a sensitivity analysis) wanted ODS; and Explore how to capitalize on the credibility of For markets covering ODS projects, describe and the Montreal Protocol Institutions including the compare in more details the rules, the methodolo- Multilateral Fund Secretariat, the Ozone Secre- gies for such projects including elements such as cri- tariat, and the UNEP TEAP. teria for project eligibility, factors accounted in the calculations of emission reductions including emis- FINAL REPORT 93 APPENDIX B:TERMS OF REFERENCE FOR THE STUDY sion reduction offset ration, technical requirements Financing Streams (options/schedule of pay- for the destruction facilities, and etc. ments) and additional support to companies of Article 5 countries if necessary; Based upon the investigation and interviews, the Ranking of candidates for ODS destruction tak- Study will: ing into account ODS substances, purity/quality, source, environmental risks (as pertains to cost); Determine and elaborate on possible concrete, and simple and workable modalities/scenarios; op- Identify any difference in rules and methodolo- tions for standardized methodologies including gies for project eligibility in voluntary carbon validation of ODS disposal given in light of vari- markets with those required by the MLF for fund- ables; ing ODS phaseout. Determine and recommend favorable elements / quality / minimum requirements for eligibility; Determine the applicability of existing and po- Utilize existing CCX case study (Argentina CTC) tential Article 5 and non-Article 5 markets deal- or any other studies to detail methodology; ing with unwanted ODS in order to apply to Review based on existing information from other companies of Article 5 countries (market con- countries, if any, (preferably small consuming ditions, nature of the regulatory/policy frame- countries) to develop case studies to support work, institutional capacity); the development of the methodology; and Using the information of the comparative anal- Identify best practice throughout project cycle yses and rules of each market, determine the to ensure optimum results at destruction (from feasibility for markets that are not dealing with packaging to transport, storage, validation of unwanted ODS to include these project type - and describe the process that is required; ciency (DRE), types of facilities/registration and Assess predictability and availability of resourc- es from voluntary carbon markets in comparison Provide recommendations on key measures to Tentative Work Plan and Schedule safeguard any leakage of unwanted ODS at Task Tentative Date Inception Report March 2009 based on best practice from existing approach- es and illustrated through case studies; Draft Report July 2009 Provide recommendations on capturing addi- Final Report December 2009 tionality and effective marketing of the scheme; and Recommend opportunities or potential markets Background Documents for unwanted ODS management to ensure that (To be used as a basis for the study and further data collection) other costs associated with collection, transpor- tation, extraction, and etc. in order to avoid any 1. “Final Draft Study on the Collection and Treat- perverse incentives. ment of Unwanted Ozone-depleting Substanc- es in Article 5 and Non-article 5 Countries,� ICF International, March 2008. UNEP/OzL.Pro/Ex- Identify possible options, mechanisms and Com/54/Inf.3. - 2. “2002 Report of the Task Force on Destruction trative costs, transportation) based on current Technologies,� (Technology and Economic As- practice in the voluntary market such as futures sessment Panel (TEAP)) and other related TEAP market, revolving funds, etc; reports. 94 Study on Financing the Destruction of Unwanted ODS APPENDIX B:TERMS OF REFERENCE FOR THE STUDY 3. Report of the Meeting of Experts to Assess the Ex- “State of the Voluntary Carbon Markets tent of Current and Future Requirements for the 2008� Hamilton, Sjardin, Marcello, Xu, Collection and Disposal of Non-reusable and Un- Ecosystem Marketplace & New Carbon Fi- wanted ODS in Article 5 Countries, MLF 2006. nance, 2008. 4. Relevant reports of the MP Meetings of the Par- 6. Standards and rules of the Kyoto and voluntary ties (where ODS destruction had been included markets: in the meeting agenda). 5. Studies with Comparative Analyses of Carbon Markets: monitoring and reporting as well as valida- “Making Sense of the Voluntary Carbon Mar- ket: A Comparison of Carbon Offset emission reductions or removals�, VCS 2007. Standards� WWF Germany, March 2008. CCX rules and protocols for destruction of “The World Bank State and Trends of the Car- ODS, available at: bon Market 2007� Capoor and Ambrosi, http://www.chicagoclimatex.com/ World Bank, 2008. CDM rules and protocols, available at: www.unfccc.int. FINAL REPORT 95 APPENDIX C Methodology for Estimating ODS Potentially Available for Destruction from Retired Equipment at End-of-Life This appendix presents the methodology, data sourc- IPCC’s Fourth Assessment Report (AR4) (2007). An es, and assumptions used to estimate the amount average GWP was also calculated for each sec- of ODS potentially recoverable for destruction tor/chemical type (which was later used as proxy from retired equipment at end-of-life in the United for converting from tonnes to tCO2e in the other States, European Union Member States, other non- geographic regions). A5 countries, and A5 countries. Broad assumptions were made about the amount of ODS remaining at European Union: range of 1%, 10%, and 50% recovered was applied to estimate a high and low bound of amounts re- covered.32 protection sectors are provided by chemical type (i.e., CFCs, HCFCs, and halons) from 2010 to 2050 United States: model developed for the European Commission by ICF International (EC ODS Banking Model 8.25.09).33 U.S. estimates for the refrigeration/AC, foams, and type (i.e., CFCs, HCFCs, and halons) from 2010 to Other Non-Article 5 Countries: - vided data from the U.S. EPA’s Vintaging Model, Other Non-A5 (excluding the U.S. and EU) estimates which ICF manipulated for this study. The yearly estimates were then converted to GWP-weight- sectors are estimated by chemical type (i.e., CFCs, ed tCO2e based on 100-year GWPs presented in 32 The actual amount of refrigerant that is recovered at equipment EOL depends on a number of factors, including (a) the refrigerant charge remaining at time of disposal, (b) losses during the recovery process, (c) residual refrigerant remaining in the system (“heel�), and importantly (d) the extent to which technicians actually collect ODS from equipment. 33 Note that the EC ODS Banking Model is currently in draft form. As such, estimates may be subject to revision. FINAL REPORT 97 APPENDIX C:METHODOLOGY FOR ESTIMATING ODS POTENTIALLY AVAILABLE FOR DESTRUCTION increments), calculated based on U.S. and EU es- UNEP (2006b) also provided estimates of CFC blow- timates (explained above) and the proportion of ing agent reaching EOL in years 2010 and 2015. ODS consumption other non-A5 countries represent. The estimate was declined using a trend function (based on the 2010 and 2015 data points), reach- of data reported under Article 7 to the Ozone Sec- ing zero in 2019.36 UNEP (2006b) noted that the 2010 retariat from 1989–1993; these data showed that and 2015 estimates did not include foam products other non-A5 countries accounted for an average from building applications (i.e., construction foams) of 32% CFC consumption in all non-A5 countries, as since these foam products had much longer life- well as 15% of HCFC consumption, and 36% of halon times and would not be reaching EOL until well after consumption.34 A simple and broad assumption was 2015. Thus, it was assumed that construction foams made that other non-A5 countries were assumed to begin reaching EOL in A5 countries in 2045, based represent the same proportion of ODS potentially on an assumed lag off the U.S. estimates.37 To grow available for destruction in future years, and were the construction foam estimate from 2045 to 2050, inferred based on U.S. and EU estimates. a proxy growth trend was calculated based on the trend of CFC blowing agents from construction foams reaching EOL annually in the United States. Article 5 Countries: Based on the U.S. trend, the A5 construction foam estimate is assumed to grow from 2045 to 2048 at A5 estimates of CFCs (blowing agent and refriger- a rate of approximately 4%, and then decrease lin- ant separately) and halons potentially recoverable early at a rate of approximately 10% per year. in 2010 from retired equipment at EOL are estimated in the To grow the halon estimate to 2050, a proxy growth trend was calculated using U.S. estimates relative to - - (UNEP 2006b)—as tries (i.e., 1994), assuming that halon phaseout will commissioned by the ExCom in Decision 47/52.35 occur in 2010 in developing countries.38 Based on the U.S. growth trend of halons potentially recover- The CFC refrigerant estimate was assumed to de- able from retired equipment at EOL in each year, it is cline linearly from 2010 to 2015 at a rate of roughly assumed that in A5 countries, recoverable halon will 5%, based on data from UNEP (2006b) From 2016- grow for ten years after phaseout (2010), at a rate 2020, CFC refrigerant recoverable was assumed of approximately 6% per year. After peaking in year to decline linearly at a rate of approximately 12%, 2020, it is assumed that quantities of halons recover- based on data from TEAP (2009). Beyond 2020, it able will decrease linearly at approximately 3% per was assumed to decline linearly such that the po- year, reaching zero in 2055. tential amount recoverable at EOL reached zero ten years later, representing a ten year lag from the United States. 34 1989–1993 ODS consumption data was used as consumption would not yet be impacted by the start of ODS phaseout in developed countries. 35 Data for HCFCs is not available for developing countries. 36 The quantities reaching EOL from 2010-2019 are assumed to be appliance foams. 37 This analysis assumes that the ratio of construction foam to appliance foam in A5 countries is approximately 48% (Ashford 2001). Therefore, the quantity of construction foam reaching EOL in 2045 represents 48% of the appliance foam reaching EOL in 2010. 38 Due to a lack of accessible data for developing countries, using the U.S. growth trend as a proxy for calculating total recoverable halon bank in A5 countries was deemed the best methodology available. However, it should be noted that in of ODS phaseout in developed countries. Conversely, since ODS phaseout was mandated later in developing countries, 98 Study on Financing the Destruction of Unwanted ODS APPENDIX D Applicable Templates for Developing ODS Destruction Projects Some templates have already been developed World Bank (available at: that could be applicable for the project develop- , ment process for ODS destruction offsets in the vol- and the second, the Project Description template untary market. Two of these are reproduced below that should be used to describe projects being sub- - mitted to the VCS (available at: plate, developed by the Carbon Finance Unit of the ). PROJECT IDEA NOTE (PIN) Name of Project: Date submitted: Description of size and quality expected of a PIN Basically a PIN will consist of approximately 5-10 pages providing indicative information on: the type and size of the project its location the anticipated total amount of greenhouse gas (GHG) reduction compared to the “business-as-usual� scenario (which will be elaborated in the baseline later on at Project Design Document (PDD) level) the suggested crediting life time - duction (VERs) price in US$ or € /ton CO2e reduced FINAL REPORT 99 APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS While every effort should be made to provide as complete and extensive information as possible, it is recog- nised that full information on every item listed in the template will not be available at all times for every project. - nance.org. A. PROJECT DESCRIPTION, TYPE, LOCATION AND SCHEDULE OBJECTIVE OF THE PROJECT PROJECT DESCRIPTION AND PROPOSED ACTIVITIES TECHNOLOGY TO BE EMPLOYED39 TYPE OF PROJECT Greenhouse gases targeted CO2/CH4/N2O/HFCs/PFCs/SF6 Type of activities Abatement/CO2 sequestration Field of activities See annex 1 for examples LOCATION OF THE PROJECT Country City Brief description of the location of the project PROJECT PARTICIPANT Name of the Project Participant Role of the Project Participant a. Project Operator b. Owner of the site or project c. Owner of the emission reductions d. Seller of the emission reductions e. Project advisor/consultant f. Project investor g. Other, please specify:________________ 39 Please note that support can only be provided to projects that employ commercially available technology. It would be useful to provide a few examples of where the proposed technology has been employed. 100 Study on Financing the Destruction of Unwanted ODS APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS Organizational category a. Government b. Government agency c. Municipality d. Private company e. Non Governmental Organization f. Other, please specify: ________________ Contact person Address Telephone/Fax E-mail and web address, if any Main activities Summary of the relevant experience of the Project Participant PROJECT PARTICIPANT Name of the Project Participant Role of the Project Participant a. Project Operator b. Owner of the site or project c. Owner of the emission reductions d. Seller of the emission reductions e. Project advisor/consultant f. Project investor g. Other, please specify: ________________ Organizational category a. Government b. Government agency c. Municipality d. Private company e. Non Governmental Organization f. Other, please specify: ________________ Contact person Address Telephone/Fax E-mail and web address, if any Main activities FINAL REPORT 101 APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS Summary of the relevant experience of the Project Participant EXPECTED SCHEDULE Earliest project start date Estimate of time required before becoming operational after Time required for legal matters: __ months approval of the PIN Time required for construction: __ months CER/ERU/VERs delivery Project lifetime For CDM projects: Expected Crediting Period For JI projects: Period within which ERUs are to be earned Current status or phase of the project Current status of acceptance of the Host Country The position of the Host Country with regard to the Kyoto Protocol __________NO / YES, YEAR_______ Has the Host Country established a CDM Designated National Authority / JI Designated Focal Point? __________NO / YES, YEAR_______ 102 Study on Financing the Destruction of Unwanted ODS APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS B. METHODOLOGY AND ADDITIONALITY ESTIMATE OF GREENHOUSE GASES ABATED/ Annual (if varies annually, provide schedule): ___ tCO2-equivalent CO2 SEQUESTERED Up to and including 2012: ___ tCO2-equivalent Up to a period of 10 years: ___ tCO2-equivalent Up to a period of 7 years: ___ tCO2-equivalent BASELINE SCENARIO CDM/JI projects must result in GHG emissions being lower than “business-as-usual� in the Host Country. At the PIN stage questions to be answered are at least: Which emissions are being reduced by the proposed CDM/ JI project? What would the future look like without the proposed CDM/JI project? About ¼ – ½ page ADDITIONALITY Please explain which additionality arguments apply to the project: i. there is no regulation or incentive scheme in place covering the project ii. not the least cost option iii. country risk, new technology for country, other barriers iv.other SECTOR BACKGROUND Please describe the laws, regulations, policies and strategies of the Host Country that are of central relevance to the proposed project, as well as any other major trends in the relevant sector. Please in particular explain if the project is running under a public incentive scheme (e.g. preferential tariffs, grants, or is required by law. If the project is already in operation, please describe if CDM/JI revenues were considered in project planning. FINAL REPORT 103 APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS METHODOLOGY Please choose from the following options: For CDM projects: i. project is covered by an existing Approved CDM Methodology or Approved CDM Small-Scale Methodology ii. project needs a new methodology iii. of existing Approved CDM Methodology For JI projects: iv.project will use a baseline and monitoring plan in accordance with Appendix B of the JI Guidelines and further JISC guidance v. project will use Approved CDM or CDM Small-Scale Methodology C. FINANCE TOTAL CAPITAL COST ESTIMATE (PRE-OPERATIONAL) Development costs ___ US$ million (Feasibility studies, resource studies, etc.) Installed costs ___ US$ million (Property plant, equipment, etc.) Land ___ US$ million Other costs (please specify) ___ US$ million (Legal, consulting, etc.) Total project costs ___ US$ million SOURCES OF FINANCE TO BE SOUGHT OR ALREADY IDENTIFIED Equity Name of the organizations, status Debt – Long-term Name of the organizations, status Debt – Short term Name of the organizations, status payments40 sought from the World Bank carbon funds. (US$ million and a brief 40 Advance payment subject to appropriate guarantees may be considered. 104 Study on Financing the Destruction of Unwanted ODS APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS SOURCES OF CARBON FINANCE other than any of the World Bank carbon funds that your are contacting (if any) INDICATIVE CER/ERU/VER PRICE PER tCO2e41 Price is subject to negotiation. Please indicate VER or CER preference if known.42 TOTAL EMISSION REDUCTION PURCHASE AGREEMENT (ERPA) VALUE ___ US$ / € commitment period) A period of 10 years ___ US$ / € A period of 7 years ___ US$ / € return at the Emission Reduction price indicated in section “Indicative CER/ERU/VER Price�. DO NOT assume World Bank carbon revenue stream. Provide a spreadsheet to support these calculations. The available at is recommended. D. EXPECTED ENVIRONMENTAL AND SOCIAL BENEFITS LOCAL BENEFITS E.g. impacts on local air, water and other pollution. GLOBAL BENEFITS than greenhouse gas emission reductions can be attributed to the project. SOCIO-ECONOMIC ASPECTS What social and economic effects can be attributed to the project and which would not have occurred in a comparable situation without that project? Indicate the communities and the from this project. 41 42 - the seller usually assumes a larger component—if not all—of the carbon risks. In such contracts, payment is typically being made upon delivery of the CER/ERU. For more information about Pricing and Risk, see “Risk and Pricing in CDM/JI Market, and Implications on Bank Pricing Guidelines for Emission Reductions�. FINAL REPORT 105 APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS What are the possible direct effects (e.g. employment creation, provision of capital required, foreign exchange effects)? What are the possible other effects (e.g. training/education associated with the introduction of new processes, technologies and products and/or the effects of a project on other industries)? ENVIRONMENTAL STRATEGY/ PRIORITIES OF THE HOST COUNTRY A brief description of the project’s consistency with the environmental strategy and priorities of the Host Country ANNEX 1 – Technologies 1. Renewables 4. Waste Management 1a. Biomass 1b. Biogas 4b. Composting 1c. Bagasse 4c. Recycling 1d. Wind 4d. Biodigestor 1e. Hydro 4e. Wastewater Management 1f. Geothermal 5. Coalmine/Coalbed Methane 1g. Photovoltaic 6. Oil and Gas Sector 1h. Solar Thermal 6a. Flared Gas Reduction 2. Fossil Fuel Switch 6b. Reduction of technical losses in distribution system 7. N2O removal 3b. Construction material 8. HFC23 Destruction 3c. District heating 9. SF6 Recovery 3d. Steel Gas Recovery 10. Transportation 9a. Fuel switch 9b. Modal switch 11. Others 106 Study on Financing the Destruction of Unwanted ODS APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS Voluntary Carbon Standard Project Description Template 19 November 2007 [Date of the VCS PD] [Table of Contents] 1 Description of Project: 1.1 Project title 1.2 Type/Category of the project 1.3 Estimated amount of emission reductions over the crediting period including project size: 1.4 A brief description of the project: 1.5 Project location including geographic and physical information allowing the unique Include GPS project boundaries. 1.6 Duration of the project activity/crediting period: - A maximum of ten years which may be renewed at most two times 1.7 Conditions prior to project initiation: FINAL REPORT 107 APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS 1.8 A description of how the project will achieve GHG emission reductions and/or removal enhancements: 1.9 Project technologies, products, services and the expected level of activity: 1.10 Compliance with relevant local laws and regulations related to the project: removal enhancements: primarily for the purpose of its subsequent removal or destruction. 1.13 Demonstration that the project has not created another form of environmental credit (for If the project has created another form of environmental credit, the proponent must provide a let- ter from the program operator that the credit has not been used and has been cancelled from the relevant program. 1.14 Project rejected under other GHG programs (if applicable): Projects rejected by other GHG programs, due to procedural or eligibility requirements where the GHG program applied have been approved by the VCS Board; can be considered for VCU but proj- ect proponents for such a project shall: - 1.15 Project proponents roles and responsibilities, including contact information of the project proponent, other project participants: reductions or removal enhancements, including legislative, technical, economic, sectoral, 1.17 List of commercially sensitive information (if applicable): Any commercially sensitive information that has been excluded from the public version of the VCS PD that will be displayed on the VCS Project Database shall be listed by the project proponent. 108 Study on Financing the Destruction of Unwanted ODS APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS 2 VCS Methodology: 2.1 Title and reference of the VCS methodology applied to the project activity and explanation of methodology choices: activity: 2.3 Identifying GHG sources, sinks and reservoirs for the baseline scenario and for the project: baseline scenario: 2.5 Description of how the emissions of GHG by source in baseline scenario are reduced below those that would have occurred in the absence of the project activity (assessment and demonstration of additionality): 3 Monitoring: 3.1 Title and reference of the VCS methodology (which includes the monitoring requirements) applied to the project activity and explanation of methodology choices: 3.2 Monitoring, including estimation, modelling, measurement or calculation approaches: 3.3 Data and parameters monitored / Selecting relevant GHG sources, sinks and reservoirs for monitoring or estimating GHG emissions and removals: FINAL REPORT 109 APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS Data / Parameter: Data unit: Description: Source of data to be used: Value of data applied for the purpose of calculating expected emission reductions Description of measurement methods and procedures to be applied: QA/QC procedures to be applied: Any comment: 3.4 Description of the monitoring plan 4 GHG Emission Reductions: 4.1 Explanation of methodological choice: 4.2 Quantifying GHG emissions and/or removals for the baseline scenario: 4.3 Quantifying GHG emissions and/or removals for the project: 4.4 Quantifying GHG emission reductions and removal enhancements for the GHG project: 5 Environmental Impact: 6 Stakeholders comments: 7 Schedule: - 110 Study on Financing the Destruction of Unwanted ODS APPENDIX D:APPLICABLE TEMPLATES FOR DEVELOPING ODS DESTRUCTION PROJECTS 8 Ownership: 8.1 Proof of Title: - 8.2 Projects that reduce GHG emissions from activities that participate in an emissions trading program (if applicable): Project proponents of projects that reduce GHG emissions from activities that: shall provide evidence that the reductions or removals generated by the project have or will not be used in the Program or jurisdiction for the purpose of demonstrating compliance. The evidence could include: FINAL REPORT 111 The World Bank 1818 H Street, NW Washington, DC 20433, USA www.worldbank.org/montrealprotocol