Environmental Engineering Reference
In-Depth Information
II. Examining the Counterparties
already exists. Using the resources available for
carbon market participants, it is easy to take a look
at how many projects exist using that methodology,
and whether or not the projects were successful
in passing the CDM process and issuing CERs.
Placing the technology and methodology in the
concept of the host country is also important—
how have they fared with similar projects in the
past? Will technology provision or acquisition
be a problem?
In the past often overlooked within the project
concept is the alignment between the project and
the goal of CER generation. This entails an exami-
nation of the incentive structure and the complexity
of the project's operability. When the alignment
between CER production and underlying project
purpose is strong, the project will be the most suc-
cessful. If the project is overly complex to operate
and the emissions reducing (CER generating) com-
ponent is inappropriately linked to the underlying
project, it will be unsuccessful. For example, in
wastewater treatment projects (whether from the
food industry, agricultural or industrial effluent)
the alignment tends to be weaker as wastewater
treatment is a nonessential part of process—i.e.
producing palm oil, paper, etc. If the CERs are
only arising from treatment of the wastewater and
failure to treat the wastewater has no effect on the
end result of the plant's output, the risk that the
wastewater will not be appropriately handled is
high. Appropriate incentives and monitoring needs
to be in place to mitigate this risk, and sharing the
carbon finance benefits is one way of doing so, for
example by structuring the CDM project's CER
offtake so that the wastewater operators reap part
of the financial benefits. This is particularly the
case if the project's complexity requires additional
skills training, i.e. in the wastewater example this
is likely the case if it was not part of the traditional
industrial process.
The next step is the KYC—know your coun-
terparty—the due diligence familiar to banks
needed to identify who the business partner is and
what their financial history looks like. In CDM
transactions, and in any other engagement, the
due diligence should go beyond bank statements.
Company history, experience, shareholders and
structure, market share, geography, and finan-
cials are all important, but how the counterparty
fits into the long-term strategy of the project is
critical. Using the wastewater example again, the
growth projection of the industrial product must
be examined to understand the likelihood of the
wastewater's continued availability through the
first lifecycle of the project, which is 7-10 years of
CERs being issued. Then, the wider market view
of competitors in the space who may be competing
for resources is considered. The local markets fall
under this risk metric as it factors into the strategy
of the counterparty and competitors. Supply and
demand, length of contracts, seasonal shifts, and
resource availability are included in the analysis.
The financial analysis for the counterparty
is traditional—company financial performance,
EBITDA, loan history, and then examining the
project financials for IRR and NPV with and
without CER revenue. These should be consid-
ered in light of the counterparty's motivations in
developing the project—how do environmental
benefits and plant improvements fit into the big
picture. How resistant is the CDM project to
market and plant fluctuations?
Within the scheme of counterparties is also
the host country, Designated National Author-
ity (DNA), and Designated Operational Entity
(DOE). A host country assessment includes the
political, economic and social aspects in situ and
how these aspects react to foreign enterprises.
In China for example, CDM projects must be
51% Chinese owned. Access to the CDM project
pipeline, available to anyone, provides a quick
