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Carbon Control

This article first appeared in the November 2010 issue of Port Strategy and is reproduced with their kind permission. www.portstrategy.com

Brian Gordon, of Holman Fenwick Willan, asks whether carbon funding can open the door for port emissions reduction projects.

Climate change may have been pushed off the public’s agenda in recent months but, regardless of its visibility, this issue continues to develop and have its impact on a number of economic sectors.

For the ports sector, I would raise two questions: what is the impact of the global climate change regulatory environment on the industry, and how can carbon finance work as a funding possibility for port-based projects aimed at reducing emissions?

Nearly all global climate change legislation is underpinned by the Kyoto Protocol to the UN Framework Convention on Climate Change. The Protocol, which is divided into phases, placed binding targets on 37 industrialised nations and the European Union (so-called Annex 1 countries) to reduce their greenhouse gas emissions. To achieve these reductions, Annex I countries, in particular the EU, have set emissions limits on certain regulated industry sectors.

As has been widely publicised, the Protocol is due to expire in 2012, with the possibility of no international agreement as to its successor. While there is much uncertainty as to what the future emissions regulatory landscape will look like if the Protocol does expire, it is certain that emissions regulation, in whatever form it takes, is not going away. Thus, there are opportunities for ports to take advantage of the current system.

The Protocol allows Annex I countries to utilise certain market mechanisms which encourage projects that reduce emissions. One of these flexible mechanisms is a project-based system called the Clean Development Mechanism; through CDM, Annex I countries can gain carbon credits by financing emissions reduction projects in developing nations (non-Annex 1 countries). The carbon credits generated from CDM projects, known as Certified Emission Reduction Units, can be traded and sold like other commodities, which has led to the creation of a new asset class - the mandatory carbon credit.

The CDM process is highly regulated by the UN and, for a project to be approved to issue CERs, a CDM project must satisfy a series of complex and technical criteria. These are designed to ensure that the project creates real and verifiable emission reductions that are in addition to reductions that would occur without it.

To prove this “additionality”, a proposed CDM project must satisfy a “financial” or “barrier” analysis. The financial analysis requires that the CDM project be financially unattractive or unfeasible without the added economic value generated by the issuance of CERs. For example, a clean energy project requiring substantial investment might lack the financial criteria to attract investors without the carbon finance associated with CDM.

The barrier analysis requires that CDM enables the proposed project to overcome technological or other barriers. For example, a project might use a technology that is new to the developing country and would not be employed without the CDM process.

International shipping accounts for 2.7% of annual global greenhouse gas emissions. During the first phase of the Kyoto Protocol, the international shipping sector is not subject to emissions limits under any national or international system. Rather, Article 2 of the Protocol places the responsibility on shipping emissions with the industry itself under the International Maritime Organization.

While the IMO has developed a set of key principles for regulating carbon emissions from ships, to date an industry-based solution continues to evade the IMO subcommittee charged with tackling the emissions issue, the Marine Environment Protection Committee. The MEPC is aware that something must be done and has met to discuss the issue, but so far it cannot reach agreement on what is, for many members, a highly politicised issue.

Should IMO members be unable to agree to a global emissions regime for the international maritime sector, it is widely anticipated that some level of emissions regulation will be thrust upon shipping, either via the UN as part of a post-2012 successor to the Kyoto Protocol, or under Europe’s flagship emissions programme, the EU Emissions Trading Scheme.

Although the IMO has yet to agree to a comprehensive regulatory scheme for maritime emissions, other industry participants are taking unilateral steps to reduce their carbon footprint. As part of this movement, a group of 45 of the world’s major ports have already committed to reducing their greenhouse gas emissions under the World Ports Climate Initiative.

The WPCI supports several projects designed to reduce emissions at ports. One of these reduces emissions from cargo handling equipment, by retrofitting the equipment with emissions control systems, replacing older equipment with newer cleaner equipment and/or utilising cleaner fuel technologies. Other potential projects include switching to intermodal transport, which reduces cargo handling and allows cargo to be transported more efficiently, thereby reducing the port’s emissions.

A major development in emissions reduction at ports is the use of an onshore power supply (OPS). Also known as cold ironing, this enables vessels to connect to a shoreside electrical power source, rather than running their diesel engines while at berth and generating a large amount of greenhouse gas emissions.

The use of OPS can drastically reduce a port’s aggregate emissions – according to the WPCI, by as much as 50%. However, the amount of emissions reduction will depend on the energy efficiency of the shoreside power supply. For example, shore power generated from coal-burning power plants will result in fewer emissions reductions than that from a cleaner energy source such as wind.

Switching to OPS requires substantial infrastructure investment at the port, as well as retrofitting of vessels. According to a recent study by the WPCI, the low cost effectiveness of OPS is cited by many ports as the primary obstacle to implementing this technology. Other reasons include lack of interested stakeholders and technological problems. Given the heavy capital costs associated with OPS and its ability to drastically reduce a port’s emissions, OPS is potentially a viable CDM project. Indeed, cost effectiveness and technological problems are precisely the type of “barriers” that the CDM process is designed to overcome.

Qualifying as a CER-generating CDM project is a complex and highly technical process. First and foremost, a port interested in registering an OPS project as a CDM project must be located in a non-Annex I developing country. Second, the OPS project must meet the “additionality” test. Given the financial and technical barriers associated with OPS, it is likely that additionality could be proven. Although this would permit the OPS project to be registered as a CDM project, an independent third party must then verify and certify the emissions reductions created by the OPS project, before CERs can be issued.

Despite the complexities, achieving CDM status for a project offers substantial benefits to the port. Most notably, the carbon financing associated with CDM could allow a port to utilise OPS, when it otherwise could not afford to do so.

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