15 March 2013

LP Gas Gets Clean Development Mechanism Acceptance

First fuel project to qualify for CDM credits.

The first fuel-switching project under the United Nations Clean Development Mechanism was registered in December 2012.

The project will help industrial companies in Peru convert from heavy fuel oil to cleaner-burning LP Gas, and may pave the way to global take-up of the fuel conversion scheme in more emissions trading platforms and national emissions-reductions strategies.

Before now, CDM projects have mostly covered renewables projects for wind and solar power.

The LP Gas conversion project is the brainchild of RYCOPESA, a wholly-owned Peruvian subsidiary of Repsol, which produces LP Gas in the form of propane and butane for local consumption and for export. The project aims to help small to medium-sized industrial enterprises (SMEs), notably in food production, aluminum, and smelting, to install new equipment that runs on LP Gas, such as burners and fuel storage systems. The capital investments will be financed through certified emissions reduction (CER) credits under the CDM system.

Because bunker fuel oil, one of the most polluting and carbon heavy oil products, costs on average USD8 per MMBTU less than cleaner-burning LP Gas, most SMEs do not have enough financial incentive to make the necessary investments in equipment to make the fuel switch.

The conversion to LP Gas reduces not only Greenhouse Gas (GHG) emissions, but also the emissions of other gases that pollute the air, such as CO, NO, NOx, SO2 and particulates. The most significant air pollutants generated in the combustion of heavy fuels include particulate matter (PM10 and PM2.5), lead, carbon monoxide, nitrogen oxide, volatile organic compounds and hydrocarbons. All of these harm human health. The reaction in the atmosphere of nitrogen oxides and hydrocarbons with sunlight also causes the formation of photochemical oxidants, primarily ozone (O3), which causes smog and respiratory diseases.

By switching from heavy fuel oil to LP Gas, NO2 is reduced by approximately 12%, the level of hydrocarbons drops by approximately 25%, and the particulate level is almost completely eliminated.

Luis de la Torre, Director of Planning for RYCOPESA, reckons the emissions reductions from the conversion project will be large: an initial reduction of 40,000 tons of CO2, or up to 1,000 tons per SME. The programme will run for 28 years with periodic independent evaluations under CDM rules.

The CDM allows emissions reduction projects in developing countries to earn CERs, each equivalent to a ton of CO2, that can be traded and sold, and used by industrialized countries to meet their emissions reductions targets under the second phase of the Kyoto Protocol that began in this January. This phase commits countries to meet internationally binding emissions reductions targets, mainly through national measures, but also through three mechanisms, including the CDM. Parties committed to reduce greenhouse gas (GHG) emissions by at least 18 percent below 1990 levels in the eight-year period from 2013 to 2020.

To reduce emissions on a larger scale, the CDM was recently retooled to increase the scale and scope of the programme. Projects can now cover an entire country and be used by other countries.

The Peru conversion is the first fuel switch to pass CDM muster because RYCOPESA came up with a methodology that can serve as a reference price for carbon, de la Torre said, adding that the US also accepts it. That opens the door for its admission in emissions trading schemes as they multiply around the globe, de la Torre added. Emissions trading platforms are currently up and running in Europe, Australia, California, and South Korea.

What is more, under the second phase of the Kyoto Protocol, countries must come up with national emissions reductions plans, called NAMAs, which could also deploy the fuel conversion scheme, de la Torre said.

Even though the price of carbon collapsed in recent months to $3 a tonne from an average of $20/tonne, de la Torre and many traders expect prices to rebound in coming months.