EWB-UK National Research Conference 2010 From Small Steps to Giant Leaps...

putting research into practice Hosted by The Royal Academy of Engineering th 19 February 2010

Indicators of CO2 emission reductions and their strategic implications in financing development in China Arthur Sebert
French Development Agency

Introduction Before coming to Cambridge to do a Master in Engineering for Sustainable Development, I have been working in Beijing (China) for the French Development Agency (AFD) for one year. AFD is the French development aid institution, present in over 60 countries around the world, mainly in Africa. Since 2003, they are also present in China, with a mandate aiming at reducing greenhouse gases emissions to fight climate change. AFD has a variety of financial tools to do so, mainly through grants and below-market-rates loans. Each year in China, they have a target of 150M (Million Euros) mainly loans to finance projects in the sectors of energy production, energy efficiency, transport, urban development and rural development. Besides fighting climate change, the second part of their mandate is to foster partnerships between France and China, politically and economically. The work of the agency in Beijing is to identify projects that could satisfy AFD's mandate, and to do a preliminary assessment, before passing them on to the headquarters in Paris, for a more thorough evaluation to eventually approve the loan. Once approved, the Beijing agency is also responsible for the follow-up of projects, as well as day-to-day relationships with the Chinese partners. I was one of only two engineers at the Beijing Agency, so I was mainly working on any scientific or technical issues, such as a project of Carbon Capture and Storage (CCS). I was also in charge of meeting French companies in Beijing, to establish and update the French offer in China in the sectors AFD was financing. But what I want to talk about here is a tool I have been using a lot during my time in China: the carbon balance of projects, and its implication on the financing of projects.

A useful tool: the cost of the ton of CO2 avoided A main indicator AFD will be using to assess the relevance of projects to their mandate is how much CO2 will not be emitted thanks to the project. To do this, we have to imagine a baseline scenario, i.e. what would happen if AFD does not finance the project. The difference between the emissions of the baseline scenario (no project) and the alternative scenario (project implemented) gives us the amount of CO2 avoided. For a development bank, it is important to put this in financial terms, and a good indicator is the cost of the ton of CO2 avoided, C. For one project, a simple calculation will be: C = Total cost of the project / Number of tons of CO2 avoided by the project. Example: A mini-hydro scheme in Wuxi was financed for 40M and is going to save 4MtCO2 over its life period. So for this project; C = 10/tCO2.

Applying this tool to a range of projects So far, nothing too tricky, but what happens when we apply this indicator to a portfolio of projects? Indeed, AFD will look for an aggregate indicator for the whole of their activity in China, so as to set targets for example. First Method The natural way to find an aggregate indicator is to add up the costs of all projects on the one hand, the CO 2 emission reductions on the other, and to do the quotient: C1 = project costs / CO2 avoided For AFD, the total cost of the projects they finance is 3175 M, for a total of 38.5 MtCO2. Thus C1= 3175 / 38.5 = 82/tCO2. Second Method The precedent calculation considered the projects as a whole. However, AFD only finances part of these projects, the rest being financed by other institutions. So what happens if we only consider CO2 emission reductions that AFD financed? For this new method, we add up AFD's contributions on the one hand, and CO2 emission reductions that AFD finances on the other hand, and we do the quotient. C2 = AFD contribution to project / CO2 avoided by AFD
Panel Presentation: Energy Author: Arthur Sebert Institution: French Development Agency (AFD)

EWB-UK National Research Conference 2010 From Small Steps to Giant Leaps...putting research into practice Hosted by The Royal Academy of Engineering th 19 February 2010

Emission reductions that AFD finances is a debatable concept, but an acceptable definition is to take the same share as for their financing. It means that if AFD finances 50% of the project, they contribute to 50% of the emission reductions. For a single project, the result will be the same for both methods, since the coefficient will be in the numerator and in the denominator. For a portfolio of projects however, the result can differ significantly. For AFD, their total contribution to the projects they finance is 365 M for a total of 19 MtCO 2. The new cost of the ton of CO2 avoided is therefore: C2 = 365 / 19 = 19/tCO2.

Conclusion Both methods are completely valid to take as a reference, and yet they lead to very different results (a factor of 4 to 1 between the two). The first one is more natural, but takes into account financing that is not from AFD, and pose the problem of counting emission reductions several times for the different financial institutions. The second tends to hide bad projects because it is a harmonic average that gives a low coefficient to projects with a high cost of the ton of CO2 avoided. The main conclusion to draw is to be careful with indicators since they can lead to very different strategies in a quite artificial way. In the sector of energy development, especially in China, investments have to be made on a wide range of solutions, from renewables to CCS, and also indirect measures such as railways electrification. If one follows the first method, he will tend to concentrate the financing on very low-cost emission reduction technologies, such as biogas boilers. But if one follows the second method he will have a more diverse portfolio, with a more integrated approach. In this regard, the second method probably leads to a more desirable indicator in terms of development, but should not be a major factor in the decision making anyway.

Panel Presentation: Energy Author: Arthur Sebert Institution: French Development Agency (AFD)