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challenges of Clean development mechanism in nigeria

by ademoroti, mayowa simeon, BS

Abstract (Summary)
One of the most pragmatic ways of encouraging and improving a healthy environment is by facilitating mechanisms through which the world can come together as one and decisively face the reality of climate change effects on Earth without inhibiting the growth and economic development of other developing economies. An example of such mechanisms was birth through Kyoto Protocol of the United Nations Framework Convention on Climate Change (UNFCCC) - The Clean Development Mechanism (CDM). This paper seeks to give an overview of the challenges faced by Clean Development Mechanism, its implementation and development in Nigeria as an incentive to facilitate speedy abolishment of gas flaring, that has been taking place for over 40 years in the country and yet the energy sector still suffers, as against the flipside of no incentive by the expiration of the gas flaring deadlines given by the Federal Government of Nigeria.
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Keywords:clean development mechanism in nigeria

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Date of Publication:11/30/2009

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STUDENT NUMBER : 15902331
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ENVIRONMENTAL FINANCE
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DUE DATE : 30TH NOVEMBER, 2009

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Page 2

A RESEARCH ESSAY

ON
CHALLENGES OF CDM IMPLEMENTATION AND
DEVELOPMENT IN NIGERIA

BY

ADEMOROTI SIMEON MAYOWA

STUDENT NO.: 15902331

NOVEMBER 30, 2009.


Page 3

TABLE OF CONTENTS

COVER PAGE ………….…………………………………… 1

TOPIC…………………..………………………………………… 2

TABLE OF CONTENT……………………………………………. 3

INTRODUCTION……………………………………………… 4

WHAT IS CDM? …………………………..…………………… 5

WHY CDM IN NIGERIA?.............. ………………………….… 6

IS THERE ANY POTENTIAL FOR CDM IN NIGERIA?....... 7

WHY IS NIGERIA LAGGING IN CDM?.....………………… 8

WHAT ARE THE CHALLENGES OF CDM IMPLEMENTATION
AND DEVELOPMENT IN NEGRIA?..................................... 8

CONCLUSION………………………………………………….. 12

REFERENCES………….……………….………………………. 12


Page 4

INTRODUCTION

In times past, news about earthquakes, hurricanes, landslides, and volcanic occurrences
are most prevalent in certain parts of the world until more recently. The world has had
cause to fight ozone layer depletion and deforestation also in recent years. Now in the last
few decades, CO2 which is part of Greenhouse Gases emission has given cause for
concern all over the world. Greenhouse Gases (GHG) are gases responsible for climate
change. The GHG gases considered under Kyoto Protocol include: CO2; SF6; PFCs; CH4;
N2O and HFCs.

The threats of climate change experienced all over the world, has made man to come into
realities of his over dependence on and exploitation of natural resources. The occurrence
of Greenhouse Gas emission as a result of demand for energy and prolific human
activities eventually led world leaders to come together in order to address climate
change issues. As discussed by Nasiru Idris Medugu in his letter to Daily Trust from the
University of Teknologi, Malaysia, on the effect of climate change in Nigeria, scientific
studies have shown rapid disappearance of snows, increase in average global
temperatures, drying up of lakes and dams with fewer water supplies for agricultural
produce and hydropower generation. In Africa, off seasons rains throwing growing
seasons out of orbit, incessant flooding and persistent droughts are a few of the effects of
climate change confirmed following the release of the 4th IPCC Assessment report on
Africa which Nigeria is part of.

One of the most pragmatic ways of encouraging and improving a healthy environment is
by facilitating mechanisms through which the world can come together as one and
decisively face the reality of climate change effects on Earth without inhibiting the
growth and economic development of other developing economies. An example of such
mechanisms was birth through Kyoto Protocol of the United Nations Framework
Convention on Climate Change (UNFCCC) - The Clean Development Mechanism
(CDM).


Page 5

This paper seeks to give an overview of the challenges faced by Clean Development
Mechanism, its implementation and development in Nigeria as an incentive to facilitate
speedy abolishment gas flaring, that has been taking place for over 40 years in the
country and yet the energy sector still suffers, as against the flipside of no incentive by
the expiration of the gas flaring deadlines given by the Federal Government of Nigeria.

What is CDM?

The Clean Development Mechanism is a market mechanism under the Kyoto Protocol
targeted at reducing GHG emissions in a cost effective way and still maintain sustainable
development in host countries by encouraging energy-efficient, capital and technology
transfer into those countries (UNFCCC 2005:29).

According to Joel D. Carlman in his article titled Jaunty Expansion or Mortal Decline –
The Clean Development Mechanism’s Moment of Truth, “CDM is an important system
because it is designed to bridge the gap between industrialized countries which are
responsible for the majority of historical greenhouse gas (GHG) and emissions and the
developing world which is expected to be the major source of future emissions”.

Under the Kyoto Protocol, three flexible mechanisms were provided; One, in which
Annex 1 parties (mostly developed countries) with mandatory emissions limitations or
“emissions caps” were called to reduce, of the six GHG emissions by at least 5 % below
that of 1990 taken as base year level within the first commitment period (2008 – 2012).
Two, in which non-annex 1 party (mostly developing countries) with no emissions
reductions limitations can also contribute towards global GHG emission reduction
through CDM project hosted in such countries and carbon credits generated in such
projects are purchased by Annex 1 parties in addition to sustainable development
contribution in such host countries. Three, in which one annex 1 party assists another
annex 1 party in implementing GHG emission reduction projects e.g. Joint
Implementation (JI) and/or the credits (carbon) generated or carbon caps are traded in an
emission trading scheme e.g. European Union Emission Trading schemes (EU ETS).


Page 6

Why CDM in Nigeria?

The Nigerian economy which is part of the Sub Saharan African economy is mainly
driven by Oil. Hence the activity surrounding its exploration, exploitation, generation and
production account for a certain percent of CO2 emission particularly through gas flaring.
In the light of gas flaring health implications and negative environmental impact, the
Federal Government of Nigeria has put a deadline for the abolishment of gas flaring since
1984 and thus gas flaring became illegal in Nigeria. Despite the illegality of gas flaring it
is very sad that this illicit act has not been stopped.

On one hand the Oil and Gas sector drives the economy and on the other hand the
agricultural sector contributes some percentage of the Nigerian GNP and on which the
employment of majority of the rural populace is hinged. The devastating socioeconomic
consequences of climate deteriorations make the consideration of Kyoto Protocol
imperative to the Nigerian Government. Despite the vulnerability of the Nigerian oil
sector to the negative short term effect on economic development being the 8th largest oil
producer in the world and the 9th largest gas deposit, the disproportionate impact on
agriculture produce and increasingly desertification and incidence of disease has induced
a very urgent attention from the stake holders.

Consequently, the effect of incessant gas flaring on the environment manifested in the
immediate communities in the Nigerian coastal regions with extreme weather changes.
Local communities relying mainly on agriculture can no longer survive on agric produce.
Food shortages and diseases related to malnutrition are evident in the villages around this
region. Acid rain, soot particles and corroded building are resultant effect of this abuse.

Against this backdrop, Nigeria ratified and accepted the Kyoto Protocol on 10th
December, 2004. This has given her a platform for participation in the carbon market and
a safe haven from the dilemma of gas flaring and deteriorating agricultural productivity.


Page 7

Is there any potential for CDM in Nigeria?

During the International Renewable Energy Conference (IREC) 2009 in Nigeria, the
conveyer, Mr. Bolade Soremekun, the CEO of Bas Associates Consulting claimed that
Nigeria has the highest equivalent of CO2 gas abated in terns of total volume in Africa.
Although South Africa and Egypt are leading in terms of number of projects registered so
far under CDM, Nigeria by the first two projects registered has the highest since the
projects were on gas flaring which is methane and 21 times GHG effect of CO2. He also
said that the country’s potentials is large as identified by expert basically due to being the
largest producer of oil and associated gas but which has been flared for close to 50 years
of exploration. The environmental impact of more than 45 years of oil exploitation and
gas flaring has made the country the only country in the world with the highest daily
pollution of CO2 into the atmosphere.

It is also very critical to note the economic implications of gas flaring aside from health
implication and environmental degradation. A recent report showed that an estimate of
about $2.5 billion represent an annual economic loss to the country.

Environmentally, the World Bank has attributed the highest sources of Greenhouse Gases
contribution to Earth’s atmosphere in the sub-saharan Africa to Nigeria. This came
despite no economic benefit nor any improvement or contribution to the decaying energy
sector of Nigeria.

Yet with the adoption and ratification of CDM by the Nigerian government, the country
still lags in its implementation and development. One would naturally assume that the
multinationals involved in gas flaring will willingly embrace CDM in other to improve
the condition of the generality of its host communities. Also it is embattling to sit back as
Nigerians and expect gas flaring to die a natural death when carbon credits can be
employed to the advantage of the betterment of the teeming Nigerian coastal region
populace. Faced with the numerous benefits that can be derived from CDM as against the
country’s former state of vulnerability, it is worth investigating, the barriers to the
development and implementation of CDM in Nigeria.


Page 8

Why is Nigeria lagging in CDM implementation and development?

The World Bank’s estimates have clearly shown that the African countries have failed to
live up to the great emission reduction credits potentials within its confines. With more
than 3,200 clean energy projects and 740 million tons of GHG reduction per year, the
continent still has just 2% share of global CDM pipeline.

In 2000, studies showed that over 3-5 billion standard cubic feet (scf) of associated gas
was produced and more than 70% was burnt off. This made Nigeria the world’s largest
gas-flarer with about 2 billion standard cubic feet a day being flared.

The challenges of CDM implementation and development in Nigeria are
summarized as follows;

Access to conventional finance: The business math behind CDM projects as enunciated
under Kyoto Protocol is that carbon finance can only turn borderline projects into viable
ones as a result of GHG reduction. Hence CDM, according to Durando Ndongsok of First
Climate in his write up on CDM IN AFRICA - Facing the hurdle of conventional
Finance, is not “a panacea for projects that make no financial sense at all”.

The basic math calculations of any CDM project must give an internal rate of return
(IRR) that is potentially viable enough to lure investors. What carbon finance is to
achieve is the increase in such IRR by for example a 2 % more in order to raise the
threshold of profitability and therefore favor implementation of such a project.

As simple as the case may look, investigation has shown that access to conventional
finance is one of the bane of the development of CDM in Africa as also in Nigeria. The
underlying factor responsible is attributed to economic viability of most ideas which are
not bankable projects.


Page 9

Awareness of most Nigerian financial institutions: Project developers in pursuit of the
above mentioned views have come to develop a notion that most banks in Nigeria do not
know what CDM is all about. This led to a sampling of most banks in the country and it
showed that most do not have any idea of what climate change, Greenhouse Gases and
CDM is all about. According to Bolade Soremekun statement during IREC 2009, he said
that “despite all the local and international media reports and features, meetings,
workshops, you will hardly find a bank with an Environment/Climate Change/Renewable
Energy Desk in Nigerian banks”. This shows that something is fundamentally not right.

The underlying course of any Foreign Investment in any project, as in the case of CDM,
is the acute interest, devotion, commitment and understanding on such project by the
locals which is not evident in this case in Nigeria. Institutional developers have the
potential to develop carbon assets but it has to be with the collaboration of the Nigerian
organizations.

Although the banks have few projects registered or in the offing, those projects are only
registered on the basis of the usual loans and project finance but not on the basis of
provision of sophisticated financial projects such as required and eligible under CDM.

Lack of Capacity building: One of the major barriers to CDM development in Nigeria is
the lack of viable project with respect to the underlying business math and adequate
knowledge base. No investor will be attracted by just any great idea without the basic
study done on viability.

In a recent World Bank study focusing on low-carbon energy in sub sahara Africa, over
750 CDM projects opportunities were identified in Nigeria. And from this study, slightly
over 100 million tCO2e of GHG emission reduction can be generated at the prevailing
global carbon market price of $12.5/tCO2e. This will amount to over $1.25 billion carbon
credits sales if these projects were implemented. Also in addition to this implementation
is the possibility of over $18 billion worth of clean energy technology transfer to the
Nigerian economy annually. But the complexities associated with CDM projects


Page 10

registrations, validation and implementations processes needs to be addressed by the
stakeholders in this fields.

In capacity building, country specific barriers to CDM development such as pre-project,
mid-project and launch issues also need to be redress adequately. For example,
inadequate knowledge base, non-existing support services and government bottlenecks
are most prevalent barriers as identified by Professor Felix B. Dayo in his paper.(a CDM
methodology expert in the Preparatory Assistance to 10 Francophone African countries
on CDM – A UNIDO funded program YA/RAF/05/005/11-53.

The need for active participation of stake holders such as the government in capacity
building cannot be over emphasized which include the provision of adequate
infrastructure by the government among other things.

Perception of host countries and policy barriers: The perception of international
investors of Nigeria to be very risky for investment is considered to be of prime
importance in CDM development barriers considerations. The Niger Delta unrest plays
another role in driving home these perceived beliefs of outsiders. Although the risk in
CDM revenue accounts for only 20% of the overall revenue, the expected growth in
CDM development is absent as most institutional investors are wary of investing.

There is a need therefore for government to come up with regulatory policies that will
ensure the safety of potential investors. The need to revamp the existing national
regulatory framework to promote and protect carbon credit investment and project
finance is also very necessary and pivotal to the growth of CDM in Nigeria.

The complexities of CDM processes and technical framework: The aforementioned
complexities of CDM project requirements for eligibility under the Kyoto protocol also
acts as a deterrent to CDM implementation and development in Nigeria. For instance,
there is a debate on going the debate on whether gas flaring will no longer qualify as a
CDM project since there is government regulation for its stoppage. Therefore, with the

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