As growing concerns and public awareness continued throughout the
1980's, several United Nations General Assembly resolutions were adopted
namely resolutions 44/228 of 22 December 1989, 43/53 of 6 December
1988, 44/207 of 22 December 1989, 45/212 of 21 December 1990 and 46/169
of 19 December 1991, urging for the protection of global climate for
present and future generations of mankind.
The
Second World Climate Conference on 7 November 1990 called for a
framework of treaty and protocols on climate change. Thus on 9 May 1992,
the environmental treaty, United Nations Framework Convention on
Climate Change ("UNFCCC") was opened for members' signature. It entered
into force on 21 March 1994. As of 11 April 2007, 191 countries and
economic community have ratified the UNFCCC.
UNFCCC is concerned
"that human activities have been substantially increasing the
atmospheric concentrations of greenhouse gases, that these increases
enhance the natural greenhouse effect, and that this will result on
average in an additional warming of the Earth's surface and atmosphere
and may adversely affect natural ecosystems and humankind."
UNFCCC's
main objective is to achieve "stabilization of greenhouse gas
concentrations in the atmosphere at a level that would prevent dangerous
anthropogenic interference with the climate system. Such a level should
be achieved within a time frame sufficient to allow ecosystems to adapt
naturally to climate change, to ensure that food production is not
threatened and to enable economic development to proceed in a
sustainable manner."
The Kyoto Protocol ("the Protocol") an
agreement made under the UNFCCC was adopted on 11 December 1997 and came
into force on 16 February 2005. The Protocol provides for stronger and
detailed commitments committing developed countries and countries under
process of transition to a market economy to legally-binding targets to
limit or reduce their greenhouse gas emissions (GHGs) (with the
exception of Australia, Croatia, Turkey and USA, which have not ratified
the Protocol. These countries and ultimately corporations within those
countries are known as Annex 1 Parties. The Annex I Parties committed
themselves to reduce their overall GHGs by at least 5% below the 1990
levels over the period between 2008 and 2012. Their GHGs reduction
targets are specified in the Protocol and vary from country to country.
The
GHGs identified in the Protocol are carbon dioxide (CO2), methane
(CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons
(PFCs) and sulphur hexafluoride (SF6). The Protocol allows the Annex I
Parties to decide which of these gases will form part of their national
emissions reductions strategy.
The Protocol provided three
mechanisms to assist Annex I Parties in meeting their GHGs targets at a
lower cost. The three mechanisms introduced are; (a) emissions trading,
this allows Annex I Parties to trade parts of their emission allowances
or assigned amount units ("AAUs") to other Annex I Parties - Article 17
of the Protocol; (b) joint implementation (JI), which allows Annex I
Parties receive emissions reductions units ("ERUs") generate by emission
reduction projects in the countries of other Annex I Parties. ERUs can
be transferred through direct sale of ERUs or part of a return of
investment in eligible JI projects - Article 6 of the Protocol; and (c) a
Clean Development Mechanism (CDM), encourages joint projects between
Annex I and non-Annex I (developing country) Parties. The non-Annex I
Parties can create certified emissions reductions ("CERs") by developing
projects that reduce emissions of GHGs thus achieving its national
sustainable development goals. Annex I Parties finances these projects
and purchase the CERs as a means to comply with its own reductions
commitments - Article 12 of the Protocol.
Despite the agreement
being approved in 1997, various negotiations were held thereafter to
determine the proper operational details to implement the Protocol to
enable the Protocol to function and accepted worldwide. Thus in 2001,
the Marrakech Accords was signed that establishes detailed rules,
procedures and modalities to implement the three mechanisms and
stimulate active participation in the Protocol.
The Marrakech
Accords laid down the eligibility criteria of a proposed CDM project;
(a) it must be approved by the host country i.e. the Designated National
Authority; (b) reduce GHG emissions to a baseline that is defined
according to the CDM modalities and procedures; (c) contribute to the
sustainable development goals of the host country (as defined by the
host country). For Malaysia, her sustainable development goals cover the
environment, social and economic aspects; (d) define exact, physical
boundaries of project activities and consider leakage i.e. emissions
occurring outside the project boundaries, related to the project
activity; provide for stakeholder participation and consultation.
Stakeholders are individuals, communities likely to be affected by the
project such as local residents, non-governmental organisations and town
councils; (e) exclude nuclear and large hydro technology; (f) prove
that no resources are diverted from official development assistance
(ODA). The term ODA applies to financial aid directed for other purposes
must not be used to finance and support CDM projects; and (g) carried
out only by countries that ratified the Protocol.
The high-level
process of undertaking a CDM project include: (a) the completion of a
project design document ("PDD") that describes the project activity, its
purpose and the technology used; (b) submission of the PDD to a UNFCCC
accredited operational entity ("DOE-A") for validation. If the project
meets the validation criteria it will be registered by the CDM Executive
Board. The operational entity is a third party that will assess the
project design against the relevant UNFCCC and host country criteria.
The important components of this are validating the baseline and
checking that the project fulfils the additionality criteria. The
concept of additionality is most directly captured by simulating the
investment decision process, and confirming that a project would not be
undertaken in the absence of payments for emission reductions. Such an
analysis would require consideration not only of the potential returns
to an investor, but also consideration of the riskiness of the returns
[Ingmar Jurgens, Gustavo Best and Leslie Lipper 2004]; (c)
implementation by the project participants of the validated plan by
monitoring emissions reductions, collecting and reporting data; (d)
periodic verification of emissions reductions by another UNFCCC
accredited operational entity other that the one who validated the PDD
("DOE-B"); and (e) if the emissions reductions are verified and
certified by the DOE-B then the CDM Executive Board will issue CERs
which will be distributed to the national registries and accounts of the
project participants.
Malaysia signed the UNFCCC on 9 June 1993
and ratified it on 13 July 1994. Malaysia ratified it the Protocol on 4
September 2002. The parties to the Protocol have agreed that renewable
energy projects which are implemented as part of government policies to
achieve sustainable development goals are eligible under the CDM.
This
additional flexibility in the CDM rules not only reduce transaction
costs for renewable energy projects, but also enable some smaller scale
projects be recognized under the CDM. This flexibility is due to the
high costs of renewable energy projects as compared to the conventional
energy projects.
There are several types of project that qualify
as CDM in Malaysia involving the renewable energy, energy efficiency
improvement, forestry, waste management and transportation sectors.
As
at 31 May 2007, there are 16 registered CDM projects in Malaysia and 31
projects with letter of approval provided by the Malaysian Designated
National Authority. Not only CDM promotes investments from Annex I
Parties, it also promotes the viability and increased use of renewable
energy such as bio-diesel an alternative to diesel (derived from
agricultural crops, wood, rice, sugar cane, empty fruit bunches, fibres
and shells), biogas an alternative to natural gas (derived from plant
and animal waste) and bio-ethanol an alternative to fuel (derived from
agricultural crops, trees or grasses).
Malaysia considers the
importance of having sustainable environment and has developed laws,
national policies and plans towards achieving her sustainable
development goals. Beginning from the Third Malaysia Plan (1976-1980),
Eight Malaysia Plan (2001-2005), including the Outline Perspective Plan
(OPP2 (1991-2000) and OPP3 (2001-2010) and thereafter the Fuel
Diversification Policy introduced in 2001 recognises renewable energy
("RE") as the economy's fifth fuel after oil, coal, natural gas and
hydro. The target was that RE contributes 5% of the country's
electricity demand by 2005. Following the policy, the government granted
tax incentives in the form of investment tax allowances, import duty
and sales tax exemption until 2010.
The government also introduced
the Small Renewable Energy Power Program ("SREP") aimed to promote RE
as the fifth fuel. Other initiatives by the government through SREP
include the Biomass Based Power Generation and Cogeneration for the Palm
Oil Industry (BioGen) Project. The RM55.9 million BioGen project is
funded by United Nations Development Programme, Global Environment
Facility and the government. Among its goals are to reduce GHGs and to
facilitate Malaysia's commitment to the Protocol.
RE projects not
only reduce GHGs but also provide additional stream of revenue to the
non Annex I Party through the sale of RE & CERs and allow technology
to be transferred to the non Annex I Party.
With the presence of
enabling laws, policies and tax allowances Malaysia has an enabling
environment that is attractive to Annex I Parties looking to develop CDM
projects in Malaysia.
CDM encourages developing countries like
Malaysia to participate in the advancement of her sustainable
development goals by placing CDM development as a priority and offering
initiatives that are beneficial to the participants.
From
Malaysia's perspective, CDM can: (a)attract investments for projects
that can shift to a more thriving but less carbon-intensive industry;
(b) allow active participation from private and public sectors ranging
from various industries; (c) provide a mechanism to transfer technology
if the investments from the Annex 1 countries are invested into projects
that replaces inefficient fossil fuel technology or creates new
technologies that are environmentally safe; and (d) help introduce new
businesses in energy production.
Industrialization and
modernization have led to the various consequences to the environment.
However, with CDM beyond the financial benefits and technological
assistance it may provide environmental benefits through carbon
reduction benefits, reductions in air and water pollution, reduced
fossil fuel use and the protection eco-systems.
In Malaysia, a
substantial number of registered CDM projects come from the palm oil
sector. There are several types of project that will contribute to
better utilisation of technology in converting palm oil waste into fuel,
extracting of gas from palm oil mill effluent retention ponds or water
recycling of the palm oil mill effluent into treated water that will in
turn improve the eco-system of the rivers.
On the social benefits,
these projects would create employment opportunities in the target
region thus progressing the social goals and address the environmental
issues in the region.
In recent years, the demand for CER from
developed countries has provided the opportunity of supporting CDM
projects in developing countries. Since CDM projects is fairly new
capacity building efforts need to be enhanced as many of the project
developers are still understanding the CDM the process and the legal
structure of the CDM projects. Not only project management is important,
contract management is essentially important. The nature of the CER
sale and purchase contract requires careful considerations as there are
various important issues that may arise during the contract negotiations
which may be a liability if not addressed carefully by both parties.
Legal document structuring will provide the parties involved the basis
support document that describes the risks and opportunities a CDM
project can contribute to each party. A carefully chosen CER sale and
purchase agreement models will provide parties the operational,
strategic and legal advantages that will assist the parties in managing
their relationship.
