The formula for the computation of the carbon emission reductions is based on the difference between the emissions in the base case and the emissions after the implementation of the project as stated earlier in section 16.4. The baseline emissions are the carbon emissions that are likely to result in the absence of the proposed project. The basic formula for the calculation of carbon emissions is as follows:

CERs = £bCb—EpCp

where: Eb = Energy produced in base case

Сь = Carbon intensity of energy in base case

Ep = Energy produced in project case

Cp = Carbon intensity of energy in project case

A summary of the calculations is shown in Figure 16.2. From the carbon analysis the anticipated carbon dioxide emissions reduction would be approximately 253673 MtC02 if the project is implemented (EIC & KITE, 2001). KITE will prepare a detailed monitoring and verification protocol, describing the specific steps to be

taken in the monitoring and verification process and the roles to be assumed by specific parties in this process.

It should be noted that the power imports have increased to about 7 per cent of the total country power demand and have not been captured in the carbon analysis. They could be quite significant as these imports are coming from a thermal plant using natural gas for power generation in la Cote d’Ivoire.

BNDES, the National Bank for Economic and Social Development, is financing approximately 80 per cent of the R$ 48 million (US$ 20.7 million) investment for the first phase of the project, following the technical specifications described above. This is done through the Special Agency for Industrial Finance (FINAME) as shown:

Companhia Energetica Santa Elisa

R$ 35 million (US$ 15 million, April 2002)

10 years, including 2 years of grace period

3.5 per cent + TJLP[21], including 1.5 per cent risk spread

The funding sources for the second phase are of the order of US$ 13 million to increase the installed capacity to 20 MW but had not yet been secured at the time of this writing.

The total volume of carbon credits expected to be generated over the seven-year (2003-2009) crediting period is 635 501 million tons of СОг — Even though the economic impact of the certificates on the investment is relatively small from the investors’ point of view, it is a means of improving the rank of the proposed project against other competing investment options. It helps to make renewable energy more competitive against fossil fuel plants such as natural gas combined cycle plants, which are very competitive and, currently, the business-as-usual case in Brazil. Thus the CDM framework brings the cogeneration expansion plan closer to any other alternative investments of equal risk.

Due to the high prospects of this project as established in the 2001 feasibility report

for both the economic and technical viability, the following issues are emerging:

• Recasting the 2001 Feasibility Report into the CDM Project Design Document (PDD);

• The base case scenario should be reviewed, as it is dynamic. It is anticipated that a 200 MWe emergency diesel power barge will be made available in Tema to supplement the low hydropower production levels. The 30MWe decommis­sioned thermal plant at Tema should be eliminated from the baseline analysis;

• Critical examination of the financials with the aim of bringing down the specific power to comparative levels with other generation methods;

• Working to attract other strategic investors to complete the financing scheme;

• Upfront funding from the estimated CERs to quick-start the project imple­mentation.

For a project such as this one, it is essential to ensure the commitment of the two

main private interests to the project, that is, the timber company and the brewery.

In addition, the terms of contract for trading the excess electricity are to be defined with the Public Utility Regulatory Commission (PURC). Finalizing the rates and costs associated with electricity sales is urgent because they have repercussions for the financial analysis. KITE will revise the financial analysis based on the cost of equipment, rate and cost negotiations with PURC, rate discussions with the brewery, and revise financing assumptions.

Scenario analyses will be carried out to explore a variety of potential project conditions, as an input to project design. These will include estimations of the level of investment required to make the project feasible, the electricity sales and purchase rates required for economic feasibility, and the pros and cons of delivering steam to the brewery. An Environmental Impact Assessment is also being prepared. Forestry practices of the main contributors of sawdust to the project are being verified to guarantee the sustainability of the whole production chain.

The proposed project seeks to convert a waste product with negative environ­mental impact (sawdust) into a highly demanded product, which has the potential to help generate income for industrial development (electricity) and poverty reduction (employment). Today, sawdust is considered as an environmental nuisance and largely goes unutilized. During power outages, all the big sawmills that produce the bulk of sawdust run expensive standby diesel generator sets to produce electricity for their production processes. Using waste sawdust to generate electricity for these sawmills is therefore an innovative response to local needs, and a contribution to climate change mitigation.

Finally, it should be mentioned that, besides its contribution to sustainable development and remarkable reductions in carbon dioxide emissions, this project has a tremendous potential for replication. The situation found in Kumasi is by no means unique and can be observed in many other developing countries, where similar pro­jects are also likely to be economically feasible.

The Climate Convention requires carbon offsets based on certified emission reduc­tions (CERs) to be clearly additional. This criterion demands that selected projects
have a credible, quantifiable and verifiable baseline of emissions, from which reductions can be measured and verified. The baseline represents the emissions from electricity generation that would occur in the absence of the certified project activity. A clearly additional project is one that represents actions that would have little chance of being taken without the use of the CDM. The reason why an independent body is needed to certify emissions reductions is that an offset transaction is not totally straight forward. Both the buyer and the seller could benefit from exaggerating the emissions reductions. To ensure that total emissions indeed decrease, emissions reductions must be real and measurable in reference to a defined baseline.

The goal is to acquire carbon offsets (CERs) of high quality. The quality of CERs from an offset project depends on the credibility of the project’s additionality. Thus, “the baseline describes the greenhouse gas emissions associated with a counterfactual scenario that would prevail without the JI or CDM intervention and with which actual emissions can be compared” (World Bank, 1999a). The credibility of the baseline is crucial, as this is the key to the acceptance of the project’s CERs.

Reliable supply of electric power is a key input for the industrialization process of developing countries’ economies. In Brazil, the growth rate of this sector is higher than that of the overall economy, as electrification is often closely linked to development priorities. The growth rate of energy demand in Brazil drives the government to invest in ready-to-use technology instead of developing new alternatives even if they could result in less greenhouse gases per MWh generated. The government’s expansion plan for the energy sector pushes ahead the thermal energy generation from 9 to 17 per cent of the installed capacity from 2001 to 2004. In this context, the carbon intensity of the electrical system obviously increases.

A cogeneration project based on renewable resources such as Santa Elisa is environmentally additional as it contrasts with what is the business-as-usual and thus likely to happen in the absence of the project. Therefore, the project is eligible under the CDM and can generate CERs. The updating of the multi-project baseline at regular intervals will be important to ensure that developments in the electricity sector are captured in the assessments of the project.

Semida Silveira

17.1. BEYOND THE BARRIERS TO BIOENERGY UTILIZATION

Bioenergy is the most important renewable energy source used in the world today. It took time for this to be fully recognized which is reflected in the fact that, only recently, efforts have been made to capture its importance in official statistics. Countries in different parts of the world have become more aware of the biomass potential they possess and the ways in which it can be used to satisfy modern energy needs and promote development. As a result, the status of bioenergy as an alterna­tive solution to meet energy demand and mitigate climate change has improved.

We can be optimistic and say that we have reached a turning point. But we should not be too optimistic as to believe that the future of biomass is given. Though we have many scenarios that capture the biomass potential and indicate the importance it can reach, we still lack a road map to take us there. Despite all the identified advantages, bioenergy utilization has increased at a modest rate. Renewable energy technologies are not competing on a level playing field due to subsidies to con­ventional technologies, and disregard of negative impacts of fossil-fuel-based energy.

In this book, we have looked into ways through which the bioenergy potential can be realized. We have seen how countries at different levels of development and with different endowments can find ways to benefit from local biomass resources for both energy provision and sustainable development. Biomass resources can be enhanced through action in forestry and agriculture. Energy-related activities can not only provide complementary income but can also improve the competitiveness of estab­lished activities in these sectors. We have looked into policies, technologies and creative ways to foster collaboration among countries towards the implementation of global and local social and environmental agendas. Concrete examples of bioenergy utilization and continued activities of research and development help to understand and disseminate bioenergy solutions, improving technical expertise, managerial practices and markets.

This chapter finalizes the book with some reflections about issues that need further exploration and research in the short and medium run, and which are

223 Bioenergy — Realizing the Potential

© 2005 Dr Semida Silveira Published by Elsevier Ltd. All rights reserved.

necessary in the process of promoting bioenergy globally. The discussion on trade­offs in the next section brings considerations related to environmental conservation, on the one hand, and development and social equity, on the other hand. How can these considerations be more constructively linked when dealing with energy-related goals and the application of sustainability principles? In the following section, the integration of systems discussed in previous chapters is further explored in the context of markets. Finally, we end with a reflection on the link between the local and the global solutions, and the role that developing countries may play in global bioenergy solutions.

The question of whether emissions reductions are additional to what would have been achieved without the offset project depends on the counterfactual conditions without the project, i. e. the baseline. The baseline emissions are the greenhouse gas emissions expected in the absence of the proposed project. Because the credibility of an offset depends on additionality, it requires a quantifiable and verifiable baseline of emissions. Thus the establishment of the baseline is key in determining the extent to which a carbon offset project is additional under the CDM.

The expected timing of emission reductions or carbon storage benefits can depend on the dynamics of the baseline or reference case. To the extent that the baseline case involves a pattern of emissions over time, the earlier those emissions occur and can be reduced by a carbon-offset project, the sooner the project can claim offset credit. This timing can strongly influence the economic performance and risk exposure of a project. For this reason, the baseline needs to be updated during the project life, and the procedure for updating the baseline forms part of the monitoring and verification protocol for the project.

In order to reduce the controversy regarding additionality and baselines, specific criteria for establishing project baselines are needed. Ideally, baseline criteria should be universal, but the potential range of CDM projects is too diverse. The criteria for baselines may vary geographically across different countries and regions, as well as technologically across different sectors and types of projects.

Thus the baseline is not static, and time variations in the generation fuel mix must be captured in the baseline carbon intensity. This is where a benchmark approach can be used to simplify the analysis. The simplest benchmarks for baseline emissions from electricity generation are (i) to use the average emission rate for the entire system (i. e. total emissions divided by total sales) or (ii) to use the weighted-average marginal emission rate.

For the Santa Elisa project, the appropriate benchmark for the baseline is the second method, that is the weighted-average marginal emission rate. The reason for this is simply the logic that governs dispatching in a generation system dominated by hydroelectric sources. Hydro resources will always be dispatched as much as possible first. Thermal sources are dispatched only when necessary to meet larger loads.

Thermal sources are a significant component of the baseline case for the Santa Elisa project. Although the total generation mix will still be dominated by base-load hydro sources, most of these sources would operate either with or without the Santa Elisa project. Considering the emissions (zero) of these base-load hydro sources in the baseline carbon intensity, it would be misleading to use the average emission rate benchmark.

In order to proceed with the quantification of the baseline scenario for the project, we need to specify the basic principles to be followed in the baseline scenario. These principles should be guided by the discussion of additionality in the CDM, and it should be adapted to the actual situation in the electric power sector of Brazil. Once we have stated the principles for defining the baseline scenarios, we can explore the detailed analysis of electricity generation dispatching and expansion planning in order to identify the baseline generation sources. Then we can determine the corresponding baseline carbon intensities against which the project should be compared to determine net emission reductions. Finally, we need to consider the updating of these estimates in the future, as an input to the monitoring and verification plan for the project.

For the Santa Elisa project, we have used a baseline methodology in which both the current Brazilian energy system and the government expansion plans are included. In this context, we have taken into consideration the economic attractiveness of thermal plants in Brazil and the shift to private-sector financing which favors thermal sources and is less conducive to hydropower. As a result, the profile of new generating capacity is likely to be different from the existing installed capacity, and power-sector expansion shall include natural gas combined-cycle thermal stations. Renewable generation sources implemented with private-sector investment should, therefore, be considered “additional to any that would occur in the absence of the certified project activity.”

Using the method described, we can estimate the carbon emission intensity of the baseline generation that will be replaced by the output of the Santa Elisa project. During the lifetime of the project, this baseline intensity will depend on the type of thermal generating stations installed at the margin in the Brazilian system and their emissions rate. The specific details of the baseline sources might change and make adjustments necessary in relation to the baseline carbon emissions intensity values. We have selected a crediting period starting in 2002 for a maximum of seven years, which may be renewed two times.

There are a number of trade-offs to be addressed when it comes to the choice of an energy path or even a specific energy project. For example, trade-offs may relate to immediate needs and scarce financial resources versus long-term societal objectives; environmental impacts versus social and economic gains; global and national societal and environmental gains versus cost allocation. The importance attached to each of these trade-offs may vary in time and place. However, the basis for dis­cussions about energy systems should be the need to guarantee the overall sustainability of human and natural systems.

Thus we need to go beyond the idea of trade-offs which gives a sense of conflict, and move towards the identification of what is essential in terms of energy provision. The World Energy Council has defined the three pillars of sustainable development in the context of energy as being accessibility, availability and acceptability of energy services. Accessibility is a challenge particularly focused on the need to provide 1.6 billion people in the world with modern energy services. Availability is related to the adequacy, reliability and quality of the energy supply. Finally, acceptability has to do with issues of economic affordability, as well as social and environmental impacts (WEC, 2001). This three-pillar concept contributes to highlight major foundations for future development of energy systems, going beyond the technical and supply orientation that used to characterize their expansion.

The benefits of accessing modern energy services are well known, and they have served to justify large investments in energy infrastructure. In fact, the focus on the benefits of energy provision added to little preoccupation with environmental impacts contributed to the rapid economic development observed in the past. The awareness about the full costs of achieving broad energy access is much more recent. For example, we are now aware that more than 40 per cent of lead emis­sions, 85 per cent of sulfur emissions and 75 per cent of carbon dioxide emissions originate from fossil fuel burning, with significant implications for the environment and health. These impacts and costs cannot be ignored in a society that aims at sustainability.

Today, we find ourselves entangled in a well-established infrastructure heavily dependent on nonrenewable resources. This infrastructure has been reliable because the technologies to deploy and use fossil fuels are mastered, synergies exist with other industries, and there are markets for these fuels operating internationally. It should not come as a surprise that fossil-fuel-based technologies have been developed and continuously improved to compete commercially, as they have been the focal point for such a long time.

There is also an established practice of subsidizing fossil fuels either directly as a way to retain jobs, for example, or by not internalizing the full costs implied in their deployment and utilization. This contributes to the strong competitiveness of fossil fuels and allows a continuous expansion of their use as if there were unlimited availability of these resources, and as if there were no limits to the resilience of our ecosystems. But fossil fuel markets are full of imperfections, particularly when it comes to oil, and affected by limitations of resource availability, and geopolitical complexities that increase price volatility with negative effects on the world economy as a whole.

In addition, previous practices contribute to the belief that energy is cheap. It gives the impression that the renewable technologies are far too expensive and not capable of competing commercially in an open market. In fact, energy has never been cheap; only we are not used to paying the full price for harnessing and using energy. The most obvious expression of the accumulated costs for energy used in the past is the increasing concentration of greenhouse gases in the atmosphere, most of which comes from fossil fuel burning. The costs of shifting energy systems towards renewable alternatives are not simply the costs of developing new technologies and creating markets for those, but also are the costs of shifting towards new infra­structure systems and paying accumulated rents.

While we are more aware of the impacts and costs of energy systems, it is important not to be trapped by them. For example, we could be trapped by the beaten track and continue the expansion of nonsustainable systems due to the political, institutional and economic difficulties implied in changing course. It could be actually claimed that this is partly happening as we watch the use of non­renewable resources advance more rapidly than justifiable because decision makers are reluctant to set new directions and because established structures are slow in implementing change. Thus we can be trapped by the difficulties to motivate good solutions to the general public, and gamble on our future instead. We need to be clear about what the trade-offs are when it comes to energy deployment and use. We need to improve understanding about the issues involved, find ways to extract synergy benefits of choosing renewable paths, and highlight them as a way to obtain broader support for change.

When energy accessibility is considered in the context of the affordability of poor populations, economic and social trade-offs are imposed. Energy services have to be affordable. A major question in many developing countries is how to mobi­lize financial resources to provide energy under conditions of volatile demand due to uneven affordability, and uncertain economic returns. This requires better distribution mechanisms which have to be developed both at country level and in cooperation with the international community. Only by making developing coun­tries part of the solution will we be able to deal with the energy and climate change debt. Bioenergy provides a road in this direction.

Using natural resources to generate social benefits is part of the sustaina­bility concept provided resilience levels are observed, and the options left to future generations are respected. In any case, trade-offs have to be made in terms of managing natural, financial and human resources. Appropriate methodologies need to be further developed for the appraisal of energy systems which capture local and global potential gains, and which are linked to proper international cooperative regimes that help foster the most desirable solutions. The global climate change agenda is a promising new platform whereby renewable technologies can receive support to gain new markets. Bioenergy is an attractive alternative at hand in this context as discussed throughout this book.

Besides being renewable, bioenergy can bring about many environmental benefits, including the recovery of degraded land, reduction of soil erosion and protection of watersheds. If properly managed, bioenergy can be C02 neutral which makes it particularly attractive as a climate change mitigation option. Bioenergy may bring about significant socioeconomic benefits in the form of rural employment and positive impacts on local economies. Thus bioenergy is not only attractive from the environmental point of view, but also provides socioeconomic advantages for both developed and developing countries (Woods and Hall, 1994).

This is not to say that bioenergy is totally free of controversy. Large expansion of monoculture, competition for land and water, and quality of soils are some of the major issues related to further development of bioenergy which shall gradually become more correlated to the evaluation of its benefits. While the possibility to use local and regional potential for bioenergy is a great advantage, the transformation of biofuels into commodities and the formation of international markets shall be determinant on the extent to which bioenergy will become a major modern energy source in the next few decades. The formation of biofuel markets will benefit developing countries which, in general, have favorable conditions for growing biomass. On the other hand, the formation of these markets will have to deal with established interests in agriculture and forestry sectors of industrialized countries, requiring innovative policies.

To be able to explore the benefits of bioenergy at full scale, we need a common dialog to try and understand the local and global trade-offs as they are perceived by different interest groups. Only then will we be able to find ways for combining top down and bottom up approaches to promote the technological and social transitions of energy systems that are needed, not least to solve the climate problem. At the end, it is a matter of bridging part of the technological and social divide that we have in the world today. In this context, bioenergy provides an alternative to tackle the energy divide while also contributing to development at large. A more open dialog would allow a clear evaluation of the trade-offs implied, avoiding the simplistic and often applied dichotomy of immediate local social benefits versus long-term global environmental gains which hampers change towards sustainable development.

Santa Elisa will sell energy to the Companhia Paulista de For? a e Luz (CPFL). CPFL is an electric distribution company serving 234 municipalities in the State of Sao Paulo. The company has had an annual growth of 4.8 per cent on average between 1989 and 1998. The peak demand of CPFL was approximately 5000 MW in 2001. CPFL’s self generation amounted to only 2.7 per cent of its total energy sales in 1995, and came mainly from hydro plants: 112 MW of hydro and 36 MW of diesel oil-fueled installed capacity[22] (e. g. Carioba). CPFL’s main supplier is CESP (Companhia Eletrica de Sao Paulo), from which CPFL purchases 95 per cent of the power, essentially all hydroelectric. CPFL must also buy 600 MW from Itaipu hydro station. In addition, CPFL has been planning a new gas-fired combined-cycle plant of 350-400 MW near Campinas next to the natural gas pipeline.

The existing installed capacity of CPFL (self-generation plus purchases under bilateral contracts) was able to meet the demand in 2001 due to the energy rationing imposed by the federal government. Specialists estimate that the energy rationing in 2001 shrank the energy market by approximately 6 per cent. In conditions of demand growth of 3.5 per cent, however, CPFL would have had to purchase energy in the spot market to meet its demand already in 2001 as the company did not have the required energy negotiated under bilateral contracts to meet the whole demand.

Since 85 per cent of the distributors’ purchases in the free market must come from bilateral contracts, and assuming that some sales are diverted away from the distribution utilities by direct sales to customers, we can assume that a somewhat smaller share (80 per cent approximately) of total generation is sold in the free market through bilateral contracts. The remaining 15-20 per cent would be nego­tiated in the spot market. The spot market sales are estimated to be the company’s total generation in an average hydrological year, minus the sales to initial contracts and bilateral contracts.

In the spot market, all the so-called South/Southeast system loads are intended to be met with the least-cost combination of available resources, comparing the value of water in an average hydrological year with the variable cost (fuel plus O&M) of the marginal thermal plant. The marginal plant is gas-fired. Between 2001 and 2003, 5.4 GW of new gas-fired capacity were added only to the S/SE and Midwest regions of Brazil[23]. Thus, the marginal plant for the Santa Elisa project baseline is gas-fired.

As a consequence of the rationing and nonliquidation of the spot market in 2001, the CPFL did increase the use of its old (1953) diesel oil-fueled thermal plant, Carioba, with 36 MW of installed capacity. One could argue that the fuel replaced in the first year of operation of the Santa Elisa project should be diesel oil, as used in Carioba, with low net efficiency. However, the project participants decided to be conservative and estimate the CERs originated by the project based on the marginal energy sources available at the spot market, where CPFL would have purchased energy otherwise. A calculation of emission intensity based on gas at the margin is an adequate baseline benchmark for small generation projects that do not cause changes to the generation expansion plan.

Changes to the generation expansion plan would make the marginal source more difficult to identify for the purpose of calculating emission changes. This is because the resulting emission change might be savings from a hydroelectric plant or a fossil-fired plant that would be deferred or completely displaced from the future generation mix, and that would not resemble the average or the marginal resource at all. Thus, defining a credible baseline case entails analyzing the existing expansion plan, for the entire national grid, to determine the generating resources that would be replaced by the CDM project, in this case Santa Elisa, and the emissions from these electricity-supply resources.

Thus, to establish the benchmark, we examine the new capacity additions called for in the recent versions of the national expansion plan. The objective is to characterize the potential new sources that could be deferred or replaced by the Santa Elisa project. Based on this approach, we can estimate the emissions of the incremental capacity displaced by Santa Elisa using its carbon emission intensity, weighted according to generation from the project.

Improvements in resource allocation and efficiency of our energy systems are needed to attain sustainability. How can we obtain increasing utility value for a much larger number of people with shrinking resources? Energy systems produce commodities that are an essential part of industrial production systems and people’s lives all over the globe. Thus energy systems need to be reliable and affordable, and transfor­mation of their organization should not put security of supply at risk.

Energy systems are complex, composed of a variety of technologies for energy generation, distribution and use which can cause significant impacts. Even if indi­vidual technologies can sometimes be uncomplicated, the internal logistics of energy systems can be quite intricate. Single technological improvements are seldom sufficient to accomplish the extent of efficiency improvements needed. It is at systems level, in which various specific technologies are included and resources well managed, that such improvements can be achieved. Dematerialization and better allocation of financial and human resources are obviously needed.

The various dimensions of energy systems, including technical, logistical, institu­tional and end-use aspects, are reflected in the infrastructure built over the centuries. Intra-system relations have also evolved, providing both opportunities and con­straints to the renewal of the energy infrastructure. Opportunities, because it is at the systems level that major innovations can make most difference; constraints, due to the usual sectoral approach to management and innovation. In addition, established systems generate jobs, economic output and social welfare, and any disruption of this balance is bound to create protest, unemployment and diseconomies.

The decentralization of ownership and management in infrastructure sectors has gradually led to institutional changes. Electricity and heat markets have been created. Besides increasing competition, energy companies have to respond to stiffening environmental regulations, changing service demands, and new technolo­gical choices. This forces companies to define innovative business strategies. Con­siderable attention has to be given to the size and quality of the demand, and there is now a stronger focus on the economic and financial dimensions of the business in contrast with the technological options at hand. This has contributed to increased efficiency within the sector but has not yet proven to offer the dynamics needed to innovate the sector at a systems level.

The political role has changed from planning the expansion and operation of the technical system per se to regulating and guaranteeing the overall balance of the system, and designing policies to foster the development of sustainable energy systems. Within this new context, new energy markets are maturing and energy infrastructure is evolving as a result of decentralized decision-making based on the given policy frameworks. If policies are ineffective, there is a risk that decisions on investments and calculations on returns become very short-sighted, leading to a less than optimal overall result. Governments need, therefore, to orchestrate energy policy in such a way that good ground is given not only for new investments but also for innovation.

The new context of energy markets is conducive to the introduction of renewable energy options and the inclusion of users as important actors in the operation and development of energy systems. Obviously, they have always been important, only the traditional engineering view of energy systems used to focus on the large-scale technological solution, often forgetting to try and understand the motivations and practices of the users. We have broadened the considerations on resource avail­ability, technology choice and reliability and are now asking questions about acceptability, cost return and profitability. More attention to the users is necessary in a competitive market thus hopefully also resulting in better service provision.

Certainly, energy research and planning have taken a new direction due to a broadening of the energy systems perspective to include the human dimension in terms of behavior and their role in the formation of energy service markets. However, conceptual changes are not enough. The present conditions can simply lead towards further development of conventional technologies in a short-sighted market approach. In contrast, markets can be used to promote innovative energy systems if the policy framework and incentives are there to help direct the responses of markets and users.

Markets have to be created for new alternatives which are considered desirable by society but which will not easily take off unless a policy framework is put in place to promote them. IEA (2003b) talks about the three perspectives through which we analyze market formation, these being (1) the research, development and deploy­ment perspective which focuses on innovation and industrial strategies; (2) the market barriers perspective which is the economist’s perspective and focuses on decisions made by investors and users; and (3) the market transformation perspective which looks into the whole chain from production to use. IEA concludes that the three perspectives are complementary and they are all needed to help define good policies that can transform visions into practice through the discipline of markets.

Within well-functioning markets, incentives for innovation have to be created, for example to promote better resource management and increase energy efficiency. Yet there are potential synergies which may not easily occur because it would require efforts that are marginal to the core activities of the industries affected. Since the potential for efficiency improvement of each single innovation is limited, optimi­zation at the unit level only gives relative gains compared with the gains that could be reached at a systems level (FRN, 1998). This is very relevant to consider in the context of climate change mitigation. Most greenhouse gas emissions come from the energy system and significant changes will have to take place in the way we organize energy infrastructure as a whole and in each unit. However, synergy effects exist within other sectors which affect energy demand and use. The scale of emissions reduction needed will require a broader view of possibilities for systems integration, for example, considering how urban and regional spaces operate.

There is a great stock of knowledge in the energy sector about the potential for raising efficiency. A number of measures and technologies that could contribute towards reducing greenhouse gas emissions are also known. But how will improved material efficiency affect energy intensity in industry and finally affect the demand for energy and transport, for example? How will information technology affect the demand for transport, the urban structure, and the use and demand for energy? The answers to these questions are not trivial and markets cannot provide them. The answers lie in innovative thinking as much as in technological innovation. Increased understanding of the interplay between the systems that compose our economy is needed to identify and implement the innovations that will lead to breakthrough.

The project’s boundaries were assumed to be the Brazilian territorial boundaries. Most sources of emissions and emissions reductions associated with this project, which take place in Brazil, were accounted for. This includes transport of charcoal and coal/coke that will or would take place in the project and baseline scenarios, as well as the coking process that is expected to take place in Brazil. The emissions associated with coal mining elsewhere and coal transport to Brazil were not included in the analysis. There are good reasons for that.

First, if these emissions were included, it would be also plausible to consider the possible sources of transnational leakage potentially generated by the project. While one could argue that the project has led to a reduction in global consumption of coal (and this is picked up by the emissions reductions taking place in Brazil), one could also argue that the reduction in imports of coal to Brazil could lead to a reduction in international prices leading to increased consumption elsewhere.

Second, there is still a lack of definition regarding the “ownership” of emissions (and consequently emissions reductions) associated with international transport. The complexity of this type of analysis, associated with the lack of definitions regarding international “property rights” related to emissions reductions, were determinant in limiting the boundaries of this analysis to the territory boundaries of Brazil.

The mitigation activity of the Plantar project is unlikely to result in significant amount of leakage. While the coke-avoidance component of the project is based on the reduction of fossil fuel consumption (imported coal), thus in a sense making this amount of coal available to the rest of the world, in global terms the project is relatively small and unlikely to have any effect on the price and consumption in the global coal market.

The forestry component is based on the establishment of 23 100 ha of sustainable and high yielding forest plantations in lieu of pastureland. Consequently, no leakage is expected. On the contrary, it is expected that the project will result in positive offsite impacts, reducing the pressure on native forests for commercial charcoal production and for fuel wood.

In the past, charcoal producers from the State of Minas Gerais have looked for other areas to relocate their production, responding to the constraints imposed on the use of native forests for charcoal. In particular, the Carajas region in the Eastern Amazon has been a major target. In theory, this could be a possible source of leakage for the Plantar project. However, investment and environmental constraints in Carajas today are similar to those in Minas Gerais. Thus, this possibility of leakage seems quite unlikely.

From a commercial perspective, these small industrialists lack capital and collateral to borrow as their equity is trapped in Minas Gerais blast furnaces, which cannot be sold in the present market. Brazilian credit markets have been quite restricted, especially after the events of 11 September in the US.

The project requires careful monitoring of other small independent pig iron producers and the large integrated mills in Brazil as a whole. Data gathered from a reputable and independent source on trends in the iron and steel industry will be used to determine whether and to what extent the independent sector of pig iron producers is expanding production based on charcoal in comparison with the coke-based production, without the benefit of carbon finance. These data will contribute to the initial verification of the industrial coke-avoidance component of the project when it is commenced in 2008. It is presumed that maintaining and assessing the significance of these data will maintain the integrity of the baseline scenario.

Under the sequestration component, the project sponsor intends to claim carbon credits from established plantations on land that has been pasture land since 1989, taking into account the CDM Modalities and Procedures.