Latin America’s Offset Projects

14 April 2008

Latin America has an important place in the carbon emissions reduction market. Having ironed out some teething problems, the region’s investment potential is growing

 

Home to the first-ever project developed under the Kyoto Protocol scheme for offsetting greenhouse gas emissions, the continent currently has 649 new projects in the pipeline. Per capita, it boasts more Carbon Emission Reduction credits (CERs) – the currency of the CDM scheme – than any other region in the world.

 

The big numbers only tell half the story. Despite Latin America ’s potential as a carbon credit producer, progress on emission-reduction schemes remains patchy. “Basically there are only a few countries that have taken advantage of the carbon market,” says Alberto Carrillo, a research and business development specialist with carbon project developer EcoSecurities.

 

Leading the pack are Brazil and Mexico , with 255 and 182 projects currently in the pipeline, respectively. The remainder of the CDM map is sketchy at best. Some sporadic activity is evident in Argentina , Chile , Honduras , Ecuador , Peru and Guatemala . Venezuela , Belize and many of the Caribbean Islands are yet to even feature.

 

 

 

Lack of political will is partly the problem. With three decades’ experience in ethanol production, Brazil ’s authorities were well set to adapt to the CDM. The remainder have had to start from scratch.

 

A limited number of local project developers compounds the problem. Those that do exist often lack access to the necessary carbon financing to make their ideas work.

 

International project developers and operators, however, remain upbeat about Latin America ’s ability to maximise its potential.

 

Most importantly, previous technical barriers are now being gradually overcome. In CDM sectors where Latin America has tended to invest, such as landfill methane and agricultural biogas, the level of expertise is now high. But as many of the larger scale projects in the region such as landfill gas are beginning to dry up, so project developers are starting to diversify.

 

 

Another sector attracting interest is renewables, notably small hydropower and wind power projects. Through the Proinfa programme in Brazil , the government offers project developers a fixed tariff for such technologies. The scheme also includes a long-term power-purchase agreement with the state-owned utility, Eletrobrás.

 

“These types of projects are attractive because they generate revenue through the sale of electricity,” says Francesca Cerchia, Latin American managing director of carbon markets for Econergy International.

 

A UK company, listed on the Aim market for small and developing enterprises, Econergy has a major wind project coming on stream in the state of Ceará, in north-eastern Brazil , during the second quarter of 2008. The 26MW wind farm is one of four renewable energy projects it has under construction in Latin America .

 

Energy efficiency, gas recovery and fuel switch projects are on analysts’ lists of the “next big things” in Latin America .

 

Should a methodology for avoided deforestation and reforestation be fully approved in the future, Brazil and other rainforest countries in Latin America will also be well positioned to take advantage.

 

 

 

In terms of investors’ portfolios, Latin America also has its merits. To date, the region’s lack of high-volume, cheap CERs has tended to push investors towards the Asian markets, notably China . But for retail investors, institutional investors and other compliance buyers with consolidated Asian interests, Latin America is providing a chance to balance their geographical and methodological risk exposure.

 

To make the region’s lower-producing CER technologies more attractive to the market, some project developers have begun bundling multiple sites into a single CDM project.

 

A case in point is a sector-wide methane capture, cogeneration and fossil-fuel replacement project proposed by Fedepalma , Colombia ’s national association of palm-oil producers. Currently under evaluation, the project envisages 31 extraction plants in four palm oil production regions. Combined under a single CDM scheme, the initiative is projected to generate an impressive 746,000 CERs per year.

 

The approach is not without its risks, however. Aside from monitoring complexities of multiple sites, bundling requires only one project to go wrong for the overall CER target to be missed.

 

A more secure bet is presented by MGM International, another international project developer operating across Latin America . In 2006, it set up a single investment portfolio for a range of CDM projects to which it owns commercialisation rights. Its current inventory consists of more than 40 million CERs.

 

But the low CER quantities of many existing methodologies will continue to hamper the market. AgCert, for example, a Dublin-based developer with more than 600 small projects in the region, recently announced it had oversold its limited production capacity.

 

The big imponderable remains life after 2012, when Kyoto Protocol commitments run out. Uncertainty about the CDM’s future is keeping many investors back from buying into cutting-edge methodologies, on the grounds that returns will come too slowly.

 

There remains an outside chance that some Latin American countries might choose to adopt voluntary emission reduction targets after the 2012 cut-off point. If that happens, then the search for carbon-reduction projects in the region will really be on.

 

 

Top countries: Projects in the pipeline

 

China : 1,003

India : 840

Brazil : 255

Mexico : 182

 

Total 2012 CERs

 

China : 1.3 billion

India : 370,000

Brazil : 170,000

Mexico : 69,000

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