Evaluation of activities implemented jointly in the Czech Republic

Vlastimil Karlik, Petr Hlobil
Program energetickych uspor

1. CAPACITY OF THE CZECH REPUBLIC AS A HOST COUNTRY FOR AIJ PROJECTS

According to the Kyoto Protocol, the Czech Republic will have to stabilize its GHG emissions at 8 percent below 1990 levels. Because of the economic downturn from 1990-1993, the level of GHG emissions in 1995 was about 76 percent of 1990 emissions. Czech Republic tradable reduction potential for JI projects was examined by the World Bank in 1998 . The World Bank considered two scenarios for high and low economic growth linked to two mitigation scenarios, as well as marginal abatement costs for GHG reduction. It estimated a favorable gap between actual and Kyoto-targeted emissions in the Czech Republic of about 10 - 30 million tonnes of CO2 in 2005. Due to the great uncertainty about future emissions and an unstable economic situation, this study recommends using at maximum 1-2 percent of national emissions during the initial trading period (2000-2005). This represents about 1,5 million tonnes of CO2 annually. The Strategy of Earth Climate System Protection in the Czech Republic, accepted by the Czech Government, recommends using 0 - 1.550 million tonnes of CO2 annually, while factoring in the uncertainty regarding completion of the Temelin nuclear plant. According to the World Bank study, the lowest reduction costs are in the energy sector.

1.1 The state of AIJ in Czech Republic
After COP-2, a national contact point for AIJ was established within the Foreign Relations Department of the Czech Ministry of Environment.

In April 1997, the Czech Ministry of Environment (MoE) published rules for AIJ projects. They have six articles, which require that:

• Applications for accepting AIJ projects must be submitted in writing to the Ministry of Environment for assessment, and must contain financial, legal and technical documentation.
• Applicants should specify their financial sources, stating the share of investment of the partner from the investor country and enclosing a statement by the partner and the approval of the relevant competent body of the investor country.
• Evidence must be given that a significant emissions reduction (at least 10% per annum from the baseline) shall occur through:
  • replacement or modification of existing technology or parts of it,
  • additions to the existing technology of "end of pipe" equipment.
• With projects resulting in long-term sequestration of CO2, the project should increase the overall stability of forest ecosystems and respect the principles of biodiversity protection.
• In addition to reducing greenhouse gas emissions, the project must bring about additional positive environmental impacts compliant with the State Environmental Policy of the Czech Republic. A project might also contribute to the development of infrastructure, provide employment, etc.
• Foreign firm's investments into subsidiaries located in the Czech Republic, made solely to meet emission limits, shall not be considered as AIJ projects.
• Except for general rules that describe measures that are in the Convention or COP decision, there are no precise regulations for assessment of additionality. The only guidance is that the project achieve a 10 percent CO2 reduction in comparison with initial states.

The AIJ projects are assessed by a working group consisting of officials from the financial and foreign relations departments of the Czech MoE. This group recommends to the Minister of Environment whether to accept or reject the projects.

At the initial phase of AIJ/JI, the government plays two roles: supporting and regulatory.

During the fully developed JI the government will act mainly as a regulator in order to fulfil its compliance with UNFCCC and the Kyoto Protocol. In this phase the regulatory role will be separated from that of support, which will be carried out by either the State Environmental Fund or the Czech Energy Agency.

The capacity of the Czech MoE for assessing, approving and monitoring AIJ/JI projects is not sufficient. The World Bank study (1998) provides some useful recommendations for the institutionalization of the JI process in the Czech Government, but these recommendations are yet to be implemented.

Recently a Czech MoE team was established to prepare more detailed rules and procedures for approving AIJ and JI projects. The new rules should be ready by the end of 1999.

In September 1999, three AIJ projects were approved by the Czech Republic MoE and one was pending. The projects are listed in the following table.

In July 1997 the Czech MoE signed an agreement with the German Ministry of Environment, Conservation and Nuclear Safety on the pilot project "Ecological Generation of Heat and Electricity in Cheb". Article 1 states that the project "will fulfill the aim of activities implemented jointly in accordance with Decision No. 5 of the First Conference of Parties of UN FCCC " . This project, which has not yet been submitted in appropriate form to the Czech MoE, is not described in this study.

In October 1999, the Ministry of Environment working group recommended accepting a project focused on reconstructing a power/heating plant at Skoda Mlada Boleslav. This project is also not described in this study, as it came up for approval after the study's completion .

2. EVALUATION OF CURRENT AIJ PROJECTS IN CZECH REPUBLIC

2.1 Decin Bynov

2.1.1 Project Description
Decin's District Heating Plant Bynov is presently being converted from use of lignite coal to gas and cogeneration. The distribution's energy efficiency is also being improved. The converted plant will have four gas motors and two gas boilers (for peak utilization) and will provide heating and hot water for local apartment blocks. A total of 2,553 fewer tonnes of CO2 will be emitted annually from the plant starting in the year 2002. In 1998 emissions (on-site plus off-site) were reduced to 36,938 tonnes of CO2 and by 2002 they will be further reduced to 34,385 tonnes. The total lifetime of the project is planned to last 25 years. Reduction of on-site emissions will be achieved by the new fuel and by increasing energy efficiency. Off-site reductions of GHG emissions will be achieved through cogeneration, which will reduce energy consumption from the national utility grid.

2.1.2 Investment and distribution of credits
The project is financed by the City of Decin, the State Environment Fund, the Danish MoE and the following US partners: the Center for Clean Air Policy (consultant), Wisconsin Electric Power Company (WEPCO), Edison Development Company and NIPSCO Industries (investors). Their contributions are listed in the table below:

In 1995, the US investors made an agreement with the City of Decin, in which they requested all on-site emissions reductions be transferred to them. Over the project's lifetime, this transfer represents about 121,400 tonnes of CO2, or the equivalent of about 5 USD/tonne of CO2. On-site emissions represent about 15 percent, while the US share of investments represents only 7 percent. As their contribution was in the form of a loan to be repaid by the citizens of Decin at the end of the project, the credits would come even more cheaply to the investors.

The agreement mentioned above was revoked by the Czech MoE, having been concluded without its participation and approval. Nevertheless, the project itself was approved.

The question of distributing credits in different forms of investment (loans, grants) is discussed in the World Bank study. According to the study, the calculation of fair distribution of credits could be based on comparison of opportunity costs.

2.1.3 Baseline and additionality
The baseline compares coal emissions with gas emissions, accounting also for decreased heat demand as a result of newly installed thermostats.

Additionally, according to the 1991 Czech Air Pollution Act, all air pollution sources should have reduced SO2 emissions substantially by the end of 1998. All district heating plants similar to the Decin plant are refurbished or are currently being refurbished. As the most typical method of refurbishing is coal to gas conversion, it was necessary to convert the fuel in the Decin heating plant by the end of 1998 in to comply with the legislation.

More realistic baseline calculations should, therefore, be based only on the increased energy efficiency of distribution. Financial analysis demonstrated that the project would not be commercially viable unless 40 percent of the total costs were covered . The grants from the Czech State Environmental Fund and the Danish MoE (see previous section) cover 45 percent of the project costs, making the involvement of US investors unnecessary.

2.1.4 Conclusions
This project, or a similar one, would have been realized to comply with Czech legislation, without the financial help of US investors. Accordingly, such projects should not be accepted by the authorities as JI.

2.2 Reforestation in the Krkonose and Sumava Mountains

2.2.1 Project Description
Areas damaged between 1950 and 1990 by either acid rain (Krkonose Mountains) or inappropriate silviculture (Sumava Mountains) are presently being reforested. Emphasis has been placed on mixed-species planting, with the goal of achieving a sustainable forest of native species.

Foreign participators include the FACE Foundation (investor) and the University of Amsterdam (research), both institutions from the Netherlands. The project has also been submitted to the Dutch Joint Implementation Registration Centre (JIRC).

The project was initiated in 1992 in conjunction with a research program carried out by the University of Amsterdam and Opocno Forestry Research Centre. The project has been implemented in several phases: 1) from 1992 to 1994; 2) from 1995 to 1997; and 3) since 1998 and ending by 2000. After the first phase of implementation, it was recommended that certain areas - such as those that would recover spontaneously and those thought to be too severely damaged to recover - be left out of the project. By the end of 1998, 4021 hectares were planted in the Krkonose Mountains and 1573 hectares in the Sumava Mountains. Evaluation and Joint Implementation monitoring has also been an ongoing process. The Forest Stewardship Council standards for sustainable forest maintenance have been applied to the project, and the first figures about sequestered CO2 will be known by the end of 1999.

2.2.2 Baseline and additionality
FACE initially calculates carbon sequestration with the CO2FIX model, and observes the development of biomass in the field. The baseline determines what the development of biomass would have been if the project had not been carried out. The net CO2 sequestration can be determined by comparing these two scenarios. But the project's additionality is not justified transparently in the project documentation. According to Czech law , deforested areas designated for silviculture need to be reforested within two years of logging. Consequently, a project similar to this one would have been carried out regardless.

2.2.3 Investment and distribution of credits
The planting portion of the project is financed by the FACE Foundation. Total costs are estimated at 31.6 million USD. A total of 11.3 million tonnes of CO2 was projected to be sequestered during the project's lifetime. The revised estimate is somewhat lower -- 9,834,120 tonnes of CO2 , or about 3.2 USD/tonne CO2 . The new forests and their wood products belong to the Krkonose National Park and the Sumava National Park. The parks' management is obligated to manage the forests for at least 99 years after planting, and it is expected that the project will be profitable during this period. According to the contract between FACE and National Park Management approved by Czech MoE, the FACE Foundation will receive future carbon credits for those 99 years , but the project's lifetime, according to FCCC listing, is now shortened to 15 years . According to unofficial information, this project will be finished by the end of 2000 and will not go to JI phase.

2.2.4 Conclusions
It seems that this project will have a positive impact on the environment. Emphasis is being placed on use of native species, and increased biological diversity and diversity of age is also being stressed. The main problem, however, is that the project does nothing more than fulfill legislation that would have had to be fulfilled regardless, so in effect it does not fulfill the criteria of environmental additionality. According to available sources, the financial additionality is fulfilled. The very long period for transfers of credits could become a potential problem for the Czech Republic. In the event that there are more similar projects, it would reduce the ability of the Czech Republic to comply with future commitments for carbon reduction. It also can increase the cost for future reduction, as it is possible to expect that the investors will then look for cheaper opportunities.

2.3 Modernization of the Cizkovice Cement Factory

2.3.1 Project Description
The participants of the project include Lafarge (France), Lafarge Ceska Republika, Ltd. and Lafarge Cizkovice, a.s.

The aim of project is to improve productivity and cement quality, while also increasing efficiency and reducing electricity consumption. At the same time, the plant will increase production (from 600,000 to 900,000 tonnes of cement per year) and will be brought into line with Czech environmental standards. Expansion is a part of Lafarge's industrial development policy and is unrelated to any AIJ project.

The Lafarge Group provides all investments. The first phase of the project will take five years. At the end of this period, the project will be reviewed and the AIJ will either be continued or terminated. The total reduction of CO2 is expected to be 168,000 tonnes of CO2 during the duration of the joint activity.

2.3.2 Baseline and additionality
The baseline calculation is divided into two parts. At the present production level (600,000 tonnes of cement per year), the gain from AIJ activity is calculated to be the difference between expected emissions from the plant without reconstruction (but accounting for improved efficiency of Czech power stations and reduced average energy consumption of Czech cement plants) and emissions after reconstruction. This reduction is calculated to be 13,200 tonnes of CO2 per year.

For production above the present level, it is assumed that the amount of cement not produced at Cizkovice would be produced in another plant, probably at the one with the most efficient production. Thus, the reference efficiency of production is the efficiency of the best plants in the Czech Republic, excluding Cizkovice. Efficiency of production of cement is then converted to CO2 emissions. The gain from AIJ for this part of the production (300,000 tonnes of cement) is calculated to be 20,400 tonnes of CO2 per year.

This method of baseline calculation, however, calls for an independent assessment. There is no guarantee that increasing production in one cement factory will lead to decreased production in another (a significant amount of cement produced in Czech Republic is exported). As the improvement of efficiency represents about 7 percent and increase of production 50 percent, the overall amount of emitted CO2 will be much higher than before realization of the project.

Neither is the additionality of the project explained in the project documentation. However, one of the reasons given by the applicant for the project is that the factory had to be modernized in order to be brought into line with Czech environmental standards.

2.3.3 Investment and distribution of credits
The project is funded entirely by Lafarge Group. The total investment is 31.9 million USD, and investment connected with emissions reduction is 5.9 million USD. With a total reduction of 168,000 tonnes of CO2, this comes to 35 USD/tonne.

2.3.4 Conclusions
The key issue with this project is whether a company investing in its own subsidiary in a host country can be considered for an AIJ project. The calculation of emissions reduction is based on the assumption that an increase of production in Cizkovice will cause a decrease of production in other cement plants. Moreover, this project is a part of the company's commercial strategy, and there is no obvious reason to support it with a transfer of CO2 credits.

2.4 Biomass heating plant in Hostetin

2.4.1 Project Description
This project, unlike the others, was not approved by the Czech Ministry of Environment during the preparation of this study.

Individual heating systems in 68 households in the village of Hostetin in eastern Moravia will be replaced by a central biomass heating plant, with supplemental solar heating. The project includes construction of the new heating plant with boiler (733 kW) and four solar panels, training of technical staff and setting up a new information centre for biomass and other renewable energy sources.

The project's foreign partners are the PSO program of the Dutch Ministry of Finance, with the Twente Energy Institute (TEI ) as applicant (the SENTER agency of the Ministry of Finance as investor), Biomass Technology Group (BTG) as executing member and KARA Energy Systems as manufacturer. The Czech participants are the Municipality of Hostetin as recipient and investor, Veronica Ecological Institute as local project manager, Bio Pal as local technical assistant, and the State Environmental Fund together with the Czech Energy Agency as donors.

The total emissions reduction is expected to be about 49,000 tonnes of CO2 equivalent during the project lifetime (15 years).

2.4.2 Baseline and additionality
The baseline assumed that the emissions of GHG during the next 15 years will not change if the project is not realized. The calculation of the reference emissions level is based on fuel and electricity consumption in households and specific emissions figures for the stoves, accounting also for the emissions from fuel transport and methane generation during biological degradation of waste wood. Emissions-saving calculations assume that emissions from combustion of wood fuel are cancelled by the growing process of the biomass, so that in the end, emissions are only produced in connection with fuel transport.

The question is whether it is correct to assume that the level of GHG emissions will remain constant if the project is not realized. There is a large program of gas pipeline construction in the Czech Republic, and even if the conditions in Hostetin are not suitable (Hostetin is a small village, distant from existing gas pipelines), construction of gas pipelines to the village would probably occur in the next 15 years if the biomass plant is not developed.

2.4.3 Investment and distribution of credits
The total cost of the project is expected to be about 923,000 USD. 393,000 USD is covered by the SENTER agency; the rest will be covered by the Czech participants (the Municipality of Hostetin, the State Environmental Fund and the Czech Energy Agency). The distribution of credit will be done according to the share of investment.

2.4.4 Conclusions
The project precisely meets the criterion of additionality regarding gas heating as an alternative. Regarding the baseline, the assumption that the level of emissions will remain constant for 15 years without realization of the project needs reassessment. For such projects, the standardized baseline should be prepared in the form of emissions reduction per heat or energy unit.

3. FINAL CONCLUSIONS

The AIJ pilot has been very useful as a learning phase for the Czech Republic. The realized projects showed that there are a number of issues to which Czech authorities, NGOs and the concerned public should pay attention. Experience with AIJ projects in the Czech Republic has proved that there is a strong need for clear and transparent criteria and procedures for project approval. The evaluation of additionality is absolutely essential for JI or AJI projects.

Some of the projects described were created in order to fulfill Czech legislative requirements. These types of projects should in the future be excluded from JI as they would have been undertaken regardless, and thus have no additionality.

Furthermore, such schemes would place domestic investors at a disadvantage - both foreign and domestic investors are required to fulfil legislative and regulative requirements but only foreign investors are able to receive credits. This is an especially important point with regards to fulfillment of the Air Protection Act and other air protection standards. This should also be kept in mind regarding the Forestry Act.

Special attention should be paid to companies that invest in their Czech subsidiaries, because it is more difficult to separate the JI parts of these projects from other company investments.

The sharing of credits is another important issue - the investment amount and the credit shares for the foreign investor were out of balance in one of the evaluated projects. In this project it was also impossible to distinguish whether the investment was made in order to reduce CO2 emissions or whether it was part of a commercially feasible investment strategy.

Currently, information on some projects is difficult to obtain and the available documentation often omits important data. Public participation in JI projects (as a part of the EIA process) could significantly increase the effectiveness of these projects and should be required. It will be essential to provide full public access to information on JI projects in all stages.

There is a great deal of uncertainty about future emissions in the Czech Republic, as well as about the economic stability of the country. We therefore recommend that the Czech Government limit use of JI for the first commitment period. Furthermore, it is evident that projects in which carbon credits are given out over a longer period of time could undermine the Czech Republic's ability to comply with future carbon reduction commitments. It is therefore in the interest of the Czech Republic to limit the validity of credits to the end of the current commitment period, i.e., to the year 2012. Czech authorities should only make longer term commitments when carbon reduction levels for the time period are absolutely clear.

The Ministry of Environment must regulate JI projects. Based on experience gained in other areas, however, it is clear that this role as a regulatory body cannot be held simultaneously with the roles of JI promoter or JI project developer. Other state agencies can carry out these tasks.

Up to this point, the JI project selection was investor-driven, and the opportunity to use JI as a tool to stimulate certain technologies was not used. JI seems to be a good tool to support market penetration of renewable energy sources. The best possible manner in which to use this opportunity is to create a short list of technologies - renewable energy sources - that will be able to receive credits on the basis of real energy production. A fixed baseline (based on emissions from gas-produced energy or electricity) can be set up for those technologies. Thus it would be possible to use JI as a means to support renewables without affecting the state budget in any way.

4. RECOMMENDATIONS

Evaluation of the projects has led us to conclude that the Czech Government should undertake the following steps:

• The Ministry of Environment should be made the regulator of JI.
• Public involvement in project evaluation should be ensured - e.g., by releasing the proposed projects for public comments.
• Because of the uncertainty regarding future emissions in the Czech Republic as well as the country's unstable economic situation, a maximum of 0.5 percent of national emissions in the first commitment period should be allotted for JI. Carbon credits should be limited to the end of the first commitment period.
• A committee of experts should be created to evaluate JI project proposals and to give recommendations to the Ministry of Environment regarding the acceptance of JI projects.
• A list of projects with fixed baselines should be drawn up. A baseline should be set at GHG emissions per unit of heat or electricity production from current gas heating and electricity production plants. This list should be limited to the following renewable sources:
  • solar heating and solar electricity
  • wind mills
  • small-scale water power plants
  • biomass energy or electricity
  • biogas
• If the Czech Republic decides to continue its current practice of case by case project approval (including individual baselines), it will be necessary to establish a set of criteria according to which JI projects will be evaluated. The criteria should be available to investors, together with clear procedures on how to apply for JI projects.

As an absolute minimum, the following points should be included in the criteria:

• Projects that simply help fulfill Czech legislative requirements should be excluded from JI.
• Investors should be prohibited from receiving a greater percentage of carbon credits than the percentage of their investment in the project.
• Investors should be able to demonstrate that the JI element of the project is additional to a "business as usual" investment. In other words, a project should not be accepted as JI if it is simply part of a least-cost investment strategy.

The project must show a minimum 10 percent reduction of emissions per annum.