By James Chester
The thick clouds of pollution hanging over Cairo might suggest that cleaning up is the last thing on the program for Egyptian industry. But from the immaculately landscaped gardens of Alexandria Carbon Black’s factory to the windswept headlands of the Gulf of Suez, heavy industry and the Ministry of Electricity have found a business case for reducing pollution — exporting hot air is profitable business.
To meet greenhouse gas emission targets established under the 1997 Kyoto Protocol (see box The Kyoto Protocol, pg 112), developed countries have options beyond just reducing their own emissions: They can either trade the carbon allowances handed out by Kyoto among themselves, or they can pay for projects in developing countries that reduce those countries’ emissions of greenhouse gases.
This is called the clean development mechanism (CDM), and its currency is carbon emissions reduction credits (CERs) that can be sold either directly to polluting industries in a wealthy country or indirectly via a broker or fund manager (see sidebar The Carbon Market, pg 108).
Worldwide, the CDM market was worth 12 billion (LE 101 billion) in 2007, an increase of almost 200% over 2006 figures. Including the value of allowances that are traded between developed countries, the entire carbon market was worth 40 billion (LE 336 billion) in 2007.
TriOcean Energy is opening what it believes to be the first consultancy firm in the country focused on encouraging CDM investment. The CDM division aims to “introduce the environmental aspect to all the industrial projects that are happening in Egypt. The first [reason] is the fact that the environment is already suffering [] and you need to reduce that as much as you can,” says Ahmed Zahran, CDM business development manager. “The second is that currently, due to the Kyoto Protocol, you can actually make money out of that. So instead of being an absolute cost on your income statement, [reducing pollution] could actually contribute to your income resources. That’s what we’re trying to do — increase environmental awareness and create income revenues as well for companies from doing that.”
Egypt is in a perfect position to take advantage of this growth industry. The combination of a favorable investment climate, potential for emissions reductions across a range of heavy industries and abundant renewable energy resources make Egypt the most attractive place to invest in CDM in the Middle East.
So far three local projects have tapped into the market and are already selling CERs. A further 56 projects are in various states of readiness, and the opportunities offered by the sector promise many more to come.
The Egyptian Market
While Egypt is not up there with the CDM heavyweights (China has 1,295 projects, Brazil has 189 and Mexico 180) it does have some aces up its sleeve. Each of the three CDMs running now is a flagship project.
Abu Qir Fertilizer Company (ABUK.CA, bt100 number 25) has the first and biggest nitrous oxide reduction scheme in Africa and the Middle East. Veolia Environmental Services has the only landfill gas capture system in Africa and the Middle East. Zafarana wind farm on the Gulf of Suez is responsible for making Egypt the biggest producer of wind energy in the Middle East.
From the current portfolio of 59 projects, optimistic government forecasts predict that six to seven million CERs will be delivered (representing seven million tons of carbon dioxide reduced) before the end of 2010.
Zahran explains that heavy industry is not the only place where pollution can be reduced: “You could be a fantastic CDM investment environment if you have lots of natural resources that you’re not using — lots of renewable energy sources. It happens that Egypt is [] very polluted on one side and on the other side you have the best locations worldwide for wind energy. It’s very obvious that you have a huge potential for solar energy as well. [] It’s about how much potential there is for the reduction of your own use of fossil fuels.”
Although investment in renewable energy is being encouraged by the government, Dr. El Sayed Sabry Mansour, coordinator of the “designated national authority” for managing CDM project applications, claims the concept of selling pollution is hard to grasp for Egyptian industry. Not only this, but the mechanism, which he says is “not yet grown up sufficiently,” takes a long time to implement.
“The difficulty that CDM projects face in developing countries is the time taken for all the long steps from the [application letter] to national approval to international approval,” says Mansour. The process usually takes several years.
Mansour also points out that large projects must spend $200,000 to $300,000 (LE 1.1–1.6 million) on the whole registration process, while it costs smaller projects around $60,000 (LE 318,000). Nevertheless, while the high cost is a discouraging factor, no applicants have failed to gain CDM status so far.
Although the government has been running workshops since 2004, and three high profile CDM projects are up and running, businesses are not rushing to sell credits. The major reason behind this, and also the biggest challenge facing the government, brokers and foreign companies in Egypt, is the lack of awareness, first of what CDM is, and second, of what it can do for business.
Companies like Abu Qir Fertilizers and Veolia Environmental Services, however, are clearing the way, and brokers like TriOcean are spreading the word that from factories to landfills, being green doesn’t just feel good — it looks good on the balance sheets too.
Pioneers of Industry
Heavy industry does not need to be destructive. At state-owned Abu Qir Fertilizers, an Austrian CDM investor proposed the installation of machinery to reduce nitrous oxide emissions. This was the first such project in Egypt, and it has been selling CERs since September 2006.
Hani Riskalla is general manager of Carbon Egypt, the company created by the Austrian carbon trader to manage the CDM and sell the carbon credits. He describes the difficulty his company faced.
“At the beginning of the project, when we came with the idea, it was not easy to sell it. It was something brand new in this country, and we had a lot of explanation for the people in order to convince them that what we are saying is for their benefit — it’s a win-win situation, on both sides,” he says. Carbon Egypt was the first company to negotiate an Egyptian CDM.
Apart from reducing nitrous oxide emissions by roughly 98%, one of the benefits at Abu Qir is the initiative donating 3% of CER revenue to a social fund. Riskalla explains the distribution of the income: “One hundred percent of the CERs belong directly to Carbon Egypt because we did the project [] Abu Qir didn’t finance anything [] In return we are paying Abu Qir, as a fee for using their facilities, 30% of the income for the CERs.”
Out of the total CER revenue, 2% goes to the United Nations Framework Convention for Climate Change (UNFCCC), which is the regulating body for all CDM projects worldwide, and 6.5% to the Egyptian Environmental Affairs Agency. The 3% to the social fund pays for infrastructure development in the Abu Qir area and the 30% for Abu Qir is extracted from the remainder.
Thirty percent may sound low, but it represents revenue from around 1.6 million CERs every year. The company said that total income from carbon credits was approximately 12 million (LE 101 million) per year. Keep in mind that Abu Qir had no investment costs at all, or any risk, and Carbon Egypt pays for all maintenance costs.
Money from Waste
Veolia Environmental Services (Veolia ES), known locally as Onyx Alexandria, is a different kind of enterprise. Owned by the French company Veolia Environnement, Veolia ES is one of four global Veolia subsidiaries, and the second biggest waste treatment company in the world.
The company was contracted in 2000 by the Alexandria governorate to overhaul waste-disposal facilities for the region. To deal efficiently with the waste, two landfills were constructed at Borg El-Arab and Hamam, both to the west of the city. Landfills are prone to giving off waste gases, but both facilities were built without methane-flaring systems — which capture and burn the methane produced by rotting garbage, preventing it from hitting the atmosphere — as it was unprofitable. Methane from landfills accounts for 4% of greenhouse gas emissions worldwide. Egypt has five other projects to reduce landfill gases, three of which are due to deliver CERs this year, according to the government.
Unlike Abu Qir, Veolia ES initiated and paid for its own CDM (under the guidance of the parent company) and unlike many projects, it did not sell all of its CERs in advance to one buyer. Hassan Abaza, business development and communication director for Veolia ES explains.
“We sold only 30% of the production [to a World Bank managed fund] because we thought that after we developed the project and assured better gas captures we could sell the rest at better prices,” he says, adding that the advance payment of 30% of the CERs’ worth was used to pay for installing the gas flaring equipment.
Veolia ES expects to generate approximately 3.7 million CERs over the 2006-2016 period, even though it only started delivering this year. This means that the total amount of landfill gas not emitted will be equivalent — in terms of its potential but unrealized effect on the environment — to 3.7 million tons of carbon dioxide.
The company’s philosophy is decidedly green. Mohab Abd Elkader, engineering, transfer and waste treatment manager, says: “We would have done [the project even without CDM]. We are an environmental company — we protect the environment from pollution and one of [our activities] is to collect this gas. But this investment is not to the same level as the CDM needs, so we added more equipment in order to [qualify for] CDM.” By expanding its project, 70% of the gases were flared and the company realized a profit on its $3.1 million (LE 16.4 million) investment.
Carbon Black Magic
Alexandria Carbon Black (ACB), with a similarly green philosophy, is the most recently registered CDM project, on July 27. Although the company was one of the first to start the process (in 2003), it has not sold any carbon credits yet. All that remains is for an independent auditor to verify the emissions reductions, which could take anything from three months to a year.
Like Abu Qir and Veolia ES, ACB has a strong commitment to the environment, and to corporate social responsibility. Global Marketing Head Rahul Kohli says that the company pays for health facilities in the local community and provides free food at Ramadan. The signs bearing quotes from Nelson Mandela and birthday wishes for warehouse workers on-site attest to the feel-good philosophy at ACB.
But it’s not just words. “We have state of the art equipment for making sure our environment is clean. All the water that we use is recycled. For doing all this there is a commercial benefit [] any effluent is a loss,” says Kohli. “So the philosophy our founder had was why should we let anything go? You do two things. One, you satisfy your commercial objectives. At the same time, you ensure that the plant gives an indication to people that we’re disciplined. It’s not just for show that we do something like this.”
Kohli is referring to the company’s waste gas capture system that has qualified for CDM. The investment cost was LE 55.46 million. Without selling carbon credits, it would have taken over 18 years to see a return on the investment. Now, ACB can expect to make a profit within six years, with an 18.5% return on its original investment over the initial period of CER crediting, which in ACB’s case is seven years.
The project protects the environment in two ways: Gases that would have been emitted are recycled, and secondly, the waste gas generates electricity, which replaces electricity from fossil fuels.
This, however, leads into another obstacle for CDM in Egypt. A company like ACB can generate electricity that goes towards reducing pollution, but it is almost impossible to sell it to the grid.
Fortunately for ACB, a nearby plant (AFCO) buys the electricity without it ever going into the national network. Companies like Veolia ES are not so lucky. Because of current government subsidies on electricity, it is not cost effective (even with revenue from carbon credits) to sell electricity to the government provider. This means that energy from fossil fuels continues to be used when it could be generated from industrial waste.
The situation looks likely to change within the next three years, as the subsidy regime is dropped (see “Taking Away the Trough” by Jeff Neumann and Andrew Schurgott, pg 38) and the electricity market opens up to private investors. This can only be a good thing for CDM and the environment, with more projects claiming credits through generating energy.
The Future of Energy
Renewable energy is the area with most potential in Egypt, in terms of selling carbon credits. CDM provides the impetus for movement of funds and green technology from the developed world to developing countries. Indeed, the World Bank States and Trends of the Carbon Market 2008 report estimates that “in 2007 alone, CDM has leveraged $33 billion [LE 175 billion] investment in the field of clean energy.” Out of all types of CDM projects worldwide, renewables made up the largest group at 29%, followed by energy efficiency at 20%, according to Point Carbon, a Norwegian carbon market analyst.
Currently two large hydropower projects have been approved as CDM projects by the government, and the first solar/natural gas combined cycle power plant is in its final phase of construction. While solar power is judged by most to be too expensive now, the hydropower projects at Naga Hammadi and Assiut will be generating nearly one million CERs annually within the next two years.
However, it is wind energy that has everybody talking. The government’s New and Renewable Energy Authority (NREA), under the Ministry of Electricity, manages Egypt’s wind farms. The authority currently has 305 megawatts (MW) of installed capacity in over four sites in Zafarana and 5 MW in Hurghada. This is enough to power a city the size of Port Said, excluding heavy industry use. Egypt has a total current capacity of 21,500 MW from all power sources.
Just one of the Zafarana sites is selling CERs so far, but three more are in the final phase of qualification. Rafik Yussef Georgey, a technical consultant for NREA, sees the future in wind.
“I don’t think there will be any competition [between wind and hydro] in the future. We have already exploited 95% of our hydro potential,” he says.
The accredited 120 MW project in Zafarana cost around LE 684 million to build. It generates 211,922 CERs every year, representing 211,922 tons of carbon dioxide not emitted from natural gas power stations. This might not sound very impressive, but the renewable energy portfolio is due to deliver 20% of Egypt’s electricity by 2020, and wind is the lynchpin of the NREA strategy.
Dr. Mohamed Elkhayat, director of technical affairs at the NREA Wind Energy Department, claims that Egypt is on-track to produce 7,200 MW of wind energy by 2020. The closest competitor in the region, he says, is Morocco, which has a total of 124 MW capacity, and will produce 600 MW by 2015.
The secondary benefit is that natural gas supply can be conserved. “I think it is a strategic decision because of the talks about Egyptian natural gas reserves and how long they will last,” says Georgey. “In any case, they should be kept as a strategic reserve for future generations.”
The CDM accredited wind farm in Zafarana was fully funded by a soft loan from the Japanese Bank for International Cooperation (JBIC). While JBIC is a major financier for CDM projects in Egypt, KfW and Danida (German and Danish development banks) are also major players.
The CERs are sold to Japanese Carbon Finance, which is owned by JBIC. Nevertheless, the government was not obliged to sell the first seven years’ worth of credits to the supplier of the loan. Georgey explains. “Japanese Carbon Finance requested to purchase the CERs from the project but this does not mean we are obliged to sell CERs to whoever installed this project. In fact we are very hard with negotiations — we only accept the best price.”
Georgey also explains why the project was credited for seven years. “For the CDM, the rules specify clearly that you only do it for seven years and renew it twice for another 14 years, or for 10 years without renewal. The wind project’s expected lifetime is not less than 20-25 years. This is the only issue. If you are not sure of the future of CDM then you had better [commit to] sell [credits] for 10 years because you’re not sure what’s going to happen. If you are sure it’s going to be renewed, then you go for seven years.”
The fact that the NREA is basing its renewable energy strategy on the CDM is a show of faith in the mechanism. This is an example of the power of CDM to change existing patterns of business. Without the incentive of carbon credits, it is very difficult to fund a wind farm in this country, even with favorable loans.
However, with the electricity market opening up and renewable technology becoming cheaper and more accessible, a healthier balance can be maintained. As private companies generate and sell electricity over the national grid, Egypt’s energy industry will diversify further, leading to more investment opportunities for carbon traders.
Is It Really Green?
One of the most common criticisms of CDM is that it does not really reduce pollution; it just moves it around the world. This is not strictly correct. Thanks to Kyoto, developing countries do not have to restrict economic growth. Instead they can continue to set up factories and increase electricity use. CDM means that at least some of the resulting pollution is abated, and revenue is earned at the same time.
The concept of ‘additionality’ makes sure pollution is moved not duplicated. Any reduction project that would have happened anyway does not get accredited by the UNFCCC, which reviews all potential projects. An applicant must prove that its emissions reduction project is ‘additional,’ i.e. the project could not occur without the funding realized from carbon credits.
The problem with additionality is its arbitrary nature. “It’s an argument, basically,” says Zahran. “You can have two identical projects, one in India and one in Egypt, both for fuel switching projects [when a dirty fuel like oil is switched to a cleaner one like natural gas], both using the same methodology and both are in very similar circumstances. Both apply for CDM acceptance and one could get accepted and one could get rejected. The same could even happen for two factories or two installations next to each other [] It all depends on how you present your project and how good your argument is.”
Next Steps
Although the European Union will impose tighter limits on the amount of pollution companies can import from CDM projects after 2012, it is likely that demand will continue to grow worldwide. Australia ratified Kyoto last December and Japan’s share of the market continues to grow. Analysts consistently predict the entry of the United States into the carbon market, but not before 2012.
Amin Zayani, a CDM research assistant at TriOcean Energy likens the situation to “the US joining the Second World War.” A potential US carbon market is valued at $1 trillion (LE 5.3 trillion) by 2020, according to New Carbon Finance, a United Kingdom-based advisory and analysis firm.
Copenhagen plays host next year to the conference that will decide the future of Kyoto. After 2012 comes a second commitment period for developed countries, but it is not a done deal. It is, however, very unlikely that ‘Kyoto countries’ will back out before this second period.
But what would happen if Kyoto ended after its first or second commitment period? Riskalla considers that benefits to industry will already have been realized. “If the Kyoto Protocol were to end [and there was] no market for the CERs, who knows? We cannot foresee what will happen afterwards. At least it is going to bring a better environmental climate for the people living around [Abu Qir]. At least you don’t have emissions [ and] you have a unit free of charge.”
If the government tightened environmental regulations and the company had to cut emissions anyway, or if the carbon market dried up, the company would still have profited, and the equipment paid for by Carbon Egypt would still belong to the fertilizer plant.
The fact that the government and private businesses in this country both plan to receive CDM revenue long after the first Kyoto period, as indicated by plans to build a raft of renewable energy plants and renew seven-year contracts across the nation, is a sign of faith in the mechanism.
The CDM does bring revenue, and in the case of renewables, it stimulates investment in technology and implementation. Companies that do implement CDM projects are responsible for significantly improving the lives of people living nearby.
It sounds pretty complicated and it might not save the world, but from fuel-switching at brick kilns to barrages on the Nile, CDM is already bringing investment, technology and employment. And more than anything, the realization that cleaning up doesn’t have to be a chore — in Egypt, it pays to be green. bt
The Carbon Market
Many people imagine the carbon market as a frontier land of carbon cowboys, or they think of hemp-shirted do-gooders looking to save the planet. It is a lot less ephemeral than one might think, and slightly more regulated. However, this is still a market where people sell the right to emit an invisible substance.
Essentially, the global carbon market consists of the European Union, Russia, Japan, Australia, New Zealand and Canada. Each country is allowed to emit a certain amount of greenhouse gases. The allowances can be traded between countries — this is called emissions trading. It is also possible for a developed country to invest in an emissions reduction project in another developed country; this is ‘joint implementation’ (JI). The third mechanism is CDM.
Ahmed Zahran, CDM business development manager at TriOcean Energy explains: “There are now two kinds of certificate on the market. One is assigned by the UNFCCC [United Nations Framework Convention for Climate Change] directly to developed governments and then the governments assign them to installations [and they are traded]. And then you have other certificates that are issued by the UNFCCC through the CDM mechanism to developing countries in exchange for the projects they are doing and then those CERs are used for compliance []. So any company can be compliant using a combination [of the two].”
When a carbon credit is generated from a CDM, it is sold as a primary CER. The prices can vary wildly for primary CERs, according to the deal-making skills of the participants and the ‘quality’ of the credit. A CER from a reliable project (i.e. it is more likely to deliver the credits) now costs around 12 (LE 101). The transaction methods also vary enormously: Abu Qir Fertilizer Company never deals with its own CERs in any capacity — their creation and management being left up to Carbon Egypt — and receives 30% of their value in cash. Veolia Environmental Services, on the other hand, organized the entire process in-company, sold 30% of its CERs in advance and waited for a more receptive market to sell the rest. As a buyer, there are some good deals to be had if companies do not understand the relatively new market.
The primary CER is sold directly to a polluting company in a developed country, in which case the deal is done, or it is sold to a fund manager. If the latter, it then becomes a secondary CER, which can now sell for over 21 (LE 176). This could be managed by the World Bank, a national development bank or it could be a more shady hedge fund. The idea, as with any other financial venture, is to spread the risk: A global fund manager like EcoSecurities, which plans to sell 171 million CERs by 2012, accumulates carbon credits in advance from a range of projects.
It is standard for a CDM project or its broker to sell up to 100% of its CERs in advance to fund the project. The CERs sold are without backing and a fund can spread the risk over a variety of projects (anyone remember the sub-prime mortgage crisis?) and therefore sell for less than emissions credits, which are available when sold.
The biggest single market by far is the EU Emissions Trading Scheme (EU ETS), which trades CERs and EU allowances (EUAs), the allowances originally handed out to EU countries. Recently, because of perceived risk of the more unreliable CERs, the price difference between secondary CERs and EUAs reached double digits in May and June but the gap has closed somewhat, and at press time, it was around 5 (LE 42). The World Bank reported a doubling in the number of EUAs traded and the value of EUA trades from 2006 to 2007, taking the EUA market to $50 billion (LE 265 billion) in 2007. Secondary CERs represented 17% of EU ETS carbon trading last year.
This may just seem like a string of acronyms and numbers. What it means is that traders within the EU bought and sold 1.65 billion tons of hot air and that although CERs are not as reliable as EUAs, they still make up a sizeable proportion of the market. It is important to understand the importance of the EU market, as it purchases almost 90% of the 592 million tons of carbon dioxide equivalent traded worldwide as CERs.
The Kyoto Protocol
Everyone has heard of the Kyoto Protocol, but what does it actually mean for Egypt? The basic premise is that 37 developed countries, plus the European Union as a single entity, are committed to reducing their emissions of six greenhouse gases. Egypt and another 142 developing countries have no obligations to cap their emissions.
A rich nation is given a set number of carbon allowances, which can be traded on a number of markets, the biggest of which is the EU Emissions Trading Scheme. The United States is not part of Kyoto, but American companies do trade carbon credits on a voluntary exchange.
The six greenhouse gases measured under Kyoto are carbon dioxide, nitrous oxide, methane, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride. Each gas has a different effect on the atmosphere and not all are as damaging as each other, so for the sake of standardization, there is an equivalency rating. For example, nitrous oxide (N2O) is far more damaging than carbon dioxide, so one ton of N2O counts as 296 tons of “carbon dioxide equivalent” (CO2e). The high value of N2O accounts for the massive profits realized on CDM projects at fertilizer plants. One ton of CO2e equals one carbon credit.
Reductions should be by at least 5.2% collectively from 1990 levels, with each country’s carbon allowance calculated according to its level of industrialization. The protocol was ratified by Egypt in January 2005 and Australia was the most recent developed country to join, in December 2007. The first commitment period lasts from 2008 to 2012, and negotiations are currently underway for implementation of the second commitment period, from 2012 to 2016.
Even though the first commitment period didn’t begin until this year, the treaty came into force in 2005, and pipeline projects in Egypt plan to deliver credits up to 2030.
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