New commodity could net billions
REDUCING POLLUTION in SA – the biggest polluter on the African continent – is moving at a snail’s pace. Though main culprits Eskom and Sasol could reduce gas emissions, they haven’t taken real steps to do so.
Too bad that SA is losing out on the financial benefits of trading a new commodity created by the Kyoto Protocol on Climate Change known as carbon credits. Finance for carbon credits is channelled through the clean development mechanism (CDM) created by the protocol.
According to a 2005 PricewaterhouseCoopers study, SA stands to generate about $400m (R2,8bn) from gas emissions reduction projects. SA’s Designated National Authority (DNA), a structure that regulates and promotes the implementation of CDM activities, has received 44 CDM project applications. Seventeen of these are real projects or project development documents (PDDs) that are under review, but they are not big money spinners and the rest are project idea notes (PINs). Shockingly, there are only five registered CDM projects in SA. Eskom has submitted five PINs for renewable energy, fuel switching and energy efficiency projects. Sasol has submitted two PDDs for the coal to natural gas fuel switching project, which are awaiting approval from the DNA.
Asked about the involvement of Eskom and Sasol in CDM projects, Stanford Mwakasonda, a senior researcher at the Energy Research Centre at the University of Cape Town, says: “We have seen some action from Sasol but they know they can do better. We have yet to see some action from Eskom. I don’t know what ace they have up their sleeve, they have just been very inactive on CDM.”
Kim Fraser, general manager: Sasol Safety, Health & Environmental Centre, says: “Sasol is embarking on numerous projects with possible CDM opportunities. However, these projects lack ap-
Asked if Sasol, as one of the biggest polluters in the country, thought it was doing enough to reduce gas emissions in SA, Fraser said: “We do not accept the assertion that Sasol is ‘one of the biggest polluters in the country’ as this assumes a very narrow view of pollution. Once the national framework for industrial emissions has been established, we expect to see many new initiatives that will further minimise gas emissions from industries throughout SA.
“We’re aiming for a 10% improvement in greenhouse gas intensity by 2015 and a 15% improvement in energy intensity by 2015, with 2000 as the base year.”
Fraser said Sasol was screening many projects to determine whether they could attract CDM funding.
Wendy Poulton, general manager: corporate sustainability at Eskom, says: “Eskom is confident there’s benefit to be derived from the CDM market. However, the process is complex, so Eskom would support streamlining it as far as possible.”
Poulton, who has the support of the Eskom board to identify CDM projects, is faced with a challenge of long lead times for project approval and high transaction costs.
She believes the late arrival of the DNA in 2004 caused an additional delay in Eskom submitting CDM projects. “Eskom has been active in the development of the CDM, and before the DNA was put in place, extensive work was carried out internally to define potential projects.”
Eskom is also a participant in the International Emissions Trading Association, but the question remains why the company is lagging behind in delivering CDM projects. Poulton responds: “The low number of projects is due to very strong competition from other developing countries such as China and India. Given the scale of development in these countries, it’s not surprising they attract most attention.”
She says that as a result of the new focus on Africa, SA will attract more CDM projects. While it’s still moving slowly in delivering CDM locally, Eskom is asses- sing opportunities to collaborate with other African utilities to promote greenhouse gas emissions reductions.
But analysts are concerned about the number of registered CDM projects in SA and say the industry would be thrilled to see Eskom and Sasol bring their CDM projects to market.
“It’s worrying that not much is happening in SA regarding CDM projects,” says Mwakasonda, adding that the lack of an emission reduction target might be the reason. “It might be that corporates such as Eskom and others are playing a waiting game, knowing that SA is very likely to have emission reduction targets in the next commitment period and that this would be the right time for them to come aboard,” Mwakasonda says. They’re probably thinking that if they act now it will be more expensive for them to reduce emissions later, when they have binding reduction quotas from the Government.”
The Kyoto Protocol commits industrialised countries to reducing emissions of greenhouse gases from 2008 to 2012. “We feel the birth pains of the South African CDM market stem from a lack of focus on ‘the ability to execute’ by project developers when deciding when and how to undertake a CDM project,” says Henk Sa, EcoSecurities SA’s country director.
He says the protocol window becomes 1,5% shorter every month, making time the most expensive component of the CDM. The shorter the window, the more project developers will start looking for partners with a proven track record regarding their ability to execute.
However, Geoffrey Stiles, the principal at Marbek Resource Consultants, says after some initial birth pangs, SA’s procedure for approval of CDM projects seems to be working fine. “We are currently identifying CDM projects for a large international pool of companies in Europe and Japan that wish to buy carbon credits from SA projects.”
To attract international players, Mwa- kasonda says Government should provide more incentive in certain CDM investment areas, such as for renewable energy projects. He adds that Government could provide some form of capital subsidy but warns that “there’s a limit to how far these financial incentives can go, especially if they involve public funds”.
Despite the promise of investments in CDM projects, it’s proving difficult to convince companies that there are real benefits from developing projects and selling the resulting carbon credits. “Because the market is new and very volatile, business often sees it as high-risk and feels it adds little real value to their projects,” says Stiles.