Institutional Arrangement for CDM: Case of Peru

Regional Meeting for DNAs CD4CDM Project

Marrakech, Morocco 23 April 2004

Sami Kamel UNEP RISOE Center, Denmark

Background
This presentation based on the results of the study: "Peru's Institutional Strategy to Promote the Clean Development Mechanism" (2004). Authors Maria Paz Cigaran and Particia Iturregui, staff members of Peru's DNA. Study sponsored by UNEP RISOE Center as part of analytical work implemented under CD4CDM Project. Purpose of study to present and disseminate Perus institutional CDM experience among other developing countries.
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Country Context

Highest environmental authority is CONAM (National Council for the Environment) est. 1996:

Reports directly to Prime Ministers office. An Environmental Affairs Office established in each ministry to strengthen issue of environment within operations of each ministry. All offices report to CONAM and operate under its directives. They submit proposals for emission reductions, and perform quality assurance/approve EIAs. All energy, mining, industrial processes, transport, infrastructure projects are required to submit an EIA for approval.

FDI laws designed with various types of incentives to attract foreign investors. Allow for free access to local financing sources, free flow of profits and dividends.
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Continue: Country Context

Climate Change a priority in governments environmental agenda:

Political commitment to play a proactive role in CC and CDM negotiations. The National Strategy on Climate Change (mitigation, adaptation, & CDM) was incorporated into the National Environmental Plan in October 2003. Regional governorates are required to formulate and approve climate change strategies.

Submitted First National Communication to UNFCCC June 2001.

Peru ratified Kyoto Protocol September 2002.
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Peruvian National Strategy Study (NSS)

Implemented by World Bank, Swiss and national experts:

Assessed potential for CDM in the country. Identified a pipeline of 25 CDM projects: Feasibility study (3), Pre-feasibility (9), Project Profile (7), PIN (6). Energy, transport, LULUCF, solid waste, and industrial processes projects. Proposed a national CDM strategy. Created awareness & experience in project preparation among local CDM stakeholders during the preparation of the NSS.
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Strategic Considerations

When designing the national CDM strategy, Peru took into consideration:

Latin American countries have relatively high marginal abatement costs compared to Asian countries like India and China, two potential major CDM players. In Peru, energy sector makes substantial use of hydropower & less dependent on carbon than many Asian countries. Other Latin American countries have good experience in GHG market (75% of carbon financial flows for CDM in 2001/2002 were allocated to Latin America). At U$4 per tCO2, Peru has potential for exporting CERs worth U$510 million per year (including LULUCF projects) through two to five projects per year, depending on size of projects.
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Continue: Strategic Considerations

Peru should offer Unique Window where all CDM government issues be covered by only one state authority. National CDM project approval process should be transparent with full public and private participation.

Key Players in National CDM Process: 1. National Council for the Environment (CONAM)
Roles & Responsibilities:

Peruvian Designated National Authority (DNA).

Hosts the Climate Change Unit (& national CDM office): Monitor & register CDM activities in the country. Follow up and comply with EB decisions. Devise actions to overcome barriers to CDM. Produced the First National Communication for the UNFCCC. Issues CDM project approvals: Possible Conflict of Interest if CONAM also promotes CDM Projects; task assigned to the Private Sector Investment Authority (Proinversion).
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2. National Environment Fund (FONAM)

Roles and Responsibilities:

Organizes and coordinates with CONAM national CDM capacity building activities: Trained 55 people in different entities on developing PINs. Assists CDM project participants in pre-investment phase of CDM projects (identification, preparation, and data gathering). Permanente member of all CDM Project Approval Committees. National Focal Point for the Prototype Carbon Fund (PCF).
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3. State Office for Promotion of Private Investment (ProInversion)

Roles & Responsibilities:

Promotion & marketing of Peruvian CDM projects through various channels. Act as the first window for international CDM investors interested in projects in Peru. Identify & remove barriers to CDM project implementation and approval:

Organize capacity building programs for local private sector and project financing entities.

Voice the demands of local private sector in international CDM negotiations.

Work on incorporating CDM promotion strategies within the national Foreign Direct Investment (FDI) promotion plan.
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CDM Project Approval Participants

For CDM project approval, an Ad Hoc committee is formed per projectbasis (meets only when there is a project to approve):

Permanent committee members:

National Council for the Environment (CONAM) DNA. National Environment Fund (FONAM). State Office for Promotion of Private Investment (ProInversion). Ministry of Foreign Affairs. International Cooperation Agency.

Project-related committee members: Line-ministry related to project sector. NGO (from project locality). National EIA expert. Other national expert(s) as needed.

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Project Approval Procedure

Procedure
1. Submit PDD & request national approval letter (PIN is optional) 2. PDD sent to all members of Ad Hoc CDM Project Committee 3. Visit project location/interviews. Produce a report on sustainable development & locals opinion 4. Call & hold the Ad Hoc CDM Project Committee meeting 5. Committee meeting: Assess contribution to sustainable development (case by case analysis) & interview the investor 6. Letter of Approval issued for investor & Executive Board Total Approval Process: 45 days Cost per project: $4,800

Responsible Party
CDM Investor DNA DNA

DNA

Ad Hoc CDM Committee DNA/CDM Committee

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Incentives for CDM Investors

A 45 days self-imposed deadline for completion of approval process (no specific penalty for delays).

Approval process (costing $4,800) is free of charge to minimize transaction cost: Each concerned entity cover its own share of the cost for approval (67% covered by DNA). Decision to be re-visited once Peru establishes its name as a CDM destination.
Promote small social investment in project locality: Improves sustainable development prospects Improves likelihood for approval by national CDM committee & EB. Three to four CDM projects were approved using this process. All approvals completed within the 45 days deadline. 13

Key Challenges

Complying with self-imposed 45 days deadline while securing full involvement of relevant entities (the more entities involved, the more likely the potential delay in the approval):

CONAM circulated and approved a National CDM Operational Procedure among all relevant ministries & stakeholders. CONAM having an office in each line-ministry facilitates project approval process.

CONAM continuously holding various workshops and meetings to raise awareness among relevant stakeholders.

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Continue: Key Challenges

Lack of CDM project formulation capabilities among public and private sector entities.

Approach adopted by the government? Trained 20 national experts from industry, energy, waste management, agroforestry, and transportation sectors on CDM project structuring and formulation. Financing institutions received special training on evaluation of CDM projects.
Two key objectives for the government: Build local project formulation capacities in strategic CDM sectors. Reduce local transaction cost through smooth and simple project approval process.
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A Responsive Setup for DNA

CONAM continuously assessing adequacy of current institutional setup and project approval process. Portion of project approval cost covered by DNA is from CONAM budget. If number of projects increases beyond DNA capacity:

CONAM will allocate separate budget for DNA. Will charge a fee for the 45 days-approval. Will hire external consultants to review and assess submitted CDM projects to facilitate work of ad hoc committee.
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Conclusion & Lessons Learned

Key ingredients for a successful CDM sector in a host country: Political will within the government. Clear & adequate institutional & regulatory arrangement for CDM. Requirements for compliance of CDM projects with national environmental & sectoral planning should be simplified to facilitate project approval process. A host country should aim at minimizing local transaction costs. Local financial sector could play key role in CDM projects (core-financing portion).

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Continue: Conclusion & Lessons Learned

A host country should market its CDM projects to a diversified market and not to rely completely on one potential CERs buyer (e.g. PCF). Operation of the DNA needs to be frequently assessed to maintain an efficient local CDM process.

DNA budget could be initially covered by government but later a DNA should generate some sort of income.

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Peruvian DNA web site for more information:

www.conam.gob.pe

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