Malta: Climate change: investment opportunities

Author: | Published: 1 Oct 2009
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On the August 22 1988, Malta requested the inclusion of an item entitled Declaration Proclaiming Climate as part of the Common Heritage of Mankind, in the provisional agenda of the 43rd session of the UN General Assembly urging the protection of global climate for present and future generations of mankind. On September 21 1988, the General Committee of the General Assembly included an item entitled Conservation of Climate as part of the Common Heritage of Mankind and allocated the item for consideration in the Second Committee. On October 24 1988, Malta formally introduced the item at a meeting of the Plenary Session of the UN General Assembly. During the session, Malta's policy was explained in the sense that there should be global recognition of the fundamental right of every human being to enjoy climate in a state which best sustains life. Malta then presented a concrete proposal in the form of a draft resolution that was submitted for consideration in the Second Committee.

Resolution 43/53 was unanimously adopted in the plenary meeting of the General Assembly on December 6 1988. This resolution paved the way for a series of events that led to formulation of the United Nations Framework Convention on Climate Change (UNFCCC). On May 9 1992, the world's governments adopted the UNFCCC at the Earth Summit in Rio de Janeiro. In doing so, the first step was taken in addressing one of the most urgent environmental problems facing humankind. The phenomenon commonly referred to as climate change was classified as a common concern rather than having the climate declared as forming part of the common heritage of humankind. This was done in order to ensure that the discussion was elevated to a multilateral level, leading the international community towards the formulation of an effective and comprehensive strategy to protect the global climate from change as a result of state activities. This was the basis of the common concern concept which was later included in the preamble to the Convention.

Malta ratified the UNFCCC in March 1994 as a non-Annex I state party and, on the same basis, ratified the 1997 landmark protocol to the UNFCCC (the Kyoto Protocol) on November 11 2001.

The UNFCCC sets an overall framework for intergovernmental efforts to tackle the challenge posed by climate change. It recognises that the climate system is a shared resource whose stability can be affected by industrial and other emissions of carbon dioxide and other greenhouse gases (GHG). The Convention enjoys near universal membership, with 192 countries having ratified it.

The major feature of the Kyoto Protocol is that it sets binding quantified targets for 37 industrialised countries and the European Community (that are included in its Annex B) for reducing GHG emissions. This amounts to an average of five per cent against 1990 levels over the five-year period 2008 to 2012. The major distinction between the Protocol and the Convention is that while the Convention encouraged industrialised countries to stabilise GHG emissions, the Protocol commits them to do so.

Recognising that developed countries are principally responsible for the current high levels of GHG emissions in the atmosphere as a result of more than 150 years of industrial activity, the Protocol places a heavier burden on developed nations under the principle of "common but differentiated responsibilities."

Malta, being a non-Annex I party to UNFCCC has no emission limitation commitments under the latter Convention and its Protocol. Although the EU is an Annex I party and Malta is a member of the EU, Malta and Cyprus are, out of 27 EU member states, the only two countries that have no commitments under the Kyoto Protocol. All the other 25 member states are individually Annex I parties to the Convention (Annex B to the Kyoto Protocol), and so have quantified emission limitation commitments. Thus, for the time being, Malta and Cyprus have exceptional status within the EU. Even though Malta's non-Annex I status may change in the future, as the position stands to date, pursuant to its current Convention status, Malta has no emission limitation or reduction targets for greenhouse gases (GHG) for the first Kyoto Protocol commitment period (2008 to 2012).

Having ratified the UNFCCC, Malta is subject to a general commitment to respond to climate change. It is obliged to compile an inventory of its greenhouse gas emissions, and submit reports – known as national communications – on actions it is taking to implement the UNFCCC. Malta submitted its first national communication to the UNFCCC in April 2004. The national communication contains Malta's national action plan containing various measures that ought to be adopted in support of greenhouse gas mitigation. The national action plan also embraces measures that must be taken in order to allow the Maltese islands to adapt to climate change. Malta's second national communication is in preparation.

The EU is an Annex I signatory to UNFCCC and an Annex B signatory to the Kyoto Protocol. Since Malta joined the European Union on May 1 2004, additional compliance requirements have come to the fore and these go beyond Malta's international commitments under Kyoto. Malta's obligations have, in fact, since membership in 2004, been closely associated with those of the European Union, especially through the implementation of the common and co-ordinated policies and measures being advanced within the Union. Undoubtedly, with regard to the international initiatives that are being taken with respect to climate change, the EU has emerged as a global forerunner and Malta is glad to be part of those initiatives.

In adherence with the EU's acquis, Malta is required to inform the European Commission of its GHG emissions and the EU, in turn, reports the aggregated community data to the UNFCCC. In March 2009, Malta submitted to the EU its National Inventory Report for the period 1990-2007. Additionally, Malta has submitted to the EU its National Allocation Plan (NAP) for the trading period 2008 to 2012 in terms of Directive 2003/87/EC. The NAP determines the total quantity of allowances to be allocated to relevant installations operating in Malta and allocates the allowances among the different sectors and installations. To date, the only local plants falling within the scope of the EU emissions trading scheme are the Marsa and Delimara Power Stations operated by Enemalta Corporation.

In June 2008, the Ministry for Resources and Rural Affairs set up the Climate Change Committee (CCC) to address climate change, tap into sources of alternative energy and ensure that Malta's national obligations to reduce carbon dioxide emissions are adhered to in order to attain its emission targets as agreed between Malta and the EU. In January 2009, the CCC finalised its National Strategy for Policy and Abatement Measures Relating to the Reduction of Greenhouse Gas Emissions (commonly referred to as Malta's climate change strategy).

Emissions trading

The central feature of the Kyoto Protocol is its requirement that countries limit or reduce GHG emissions. Emitting GHG over a set limit will entail a potential cost. Conversely, emitters able to stay below their limit hold something of value. Thus, a new commodity was created – emission reductions. Because carbon dioxide is the principal GHG, the expression carbon trading has been coined. Carbon is now tracked and traded like any other commodity. In essence, this implies that the cost of energy is no longer dependent only on the cost of fuel on the market and the cost of production. Rather, the cost of energy will now be the cost of fuel on the market, plus the cost of production, plus the cost of emissions reduction measures, and the cost of allowances to cover actual emissions.

The Kyoto Protocol spurred the creation of the European Union Emissions Trading Scheme, and is foreseen as being a principal means for the future growth of and the linking of emissions markets globally.

Among other things, the Kyoto Protocol broke new ground with three innovative mechanisms, namely (i) joint implementation (JI), (ii) the clean development mechanism, and (iii) emissions trading. These mechanisms are designed to boost the cost-effectiveness of climate change mitigation by opening ways for parties to cut emissions, or enhance carbon sinks (a term applied to forests and other ecosystems that can remove more greenhouse gases from the atmosphere than they emit), more cheaply abroad than at home. Although the cost of limiting emissions or expanding removals varies greatly from region to region, the effect for the atmosphere is the same regardless of where the action is taken.

As provided in the Kyoto Protocol, the Clean Development Mechanism (CDM) is a scheme whereby Annex I parties (or entities in such countries) can implement sustainable development project activities in non-Annex I countries that result in reduction in emissions of greenhouse gases as compared to a defined baseline. Projects that achieve real emission reductions, according to the CDM's stringent rules, earn saleable units recognised internationally. Thus, the reduction in emissions of greenhouse gases earned by the Annex I participant function as credits, referred to as Certified Emissions Reduction (CER) units (one CER is equivalent to one tonne of carbon dioxide equivalent. Carbon dioxide equivalent is a metric measure used to compare the emissions from different greenhouse gases based upon their respective global warming potential). CERs can be utilised either by governments to help meet their own emissions targets in compliance with the Kyoto Protocol or by installations participating in the EU emissions trading scheme for compliance under Directive 2003/87/EC. Alternatively, participants can choose to trade and sell the CERs generated from the CDM project to industrialised countries to help the latter meet their part of their targets under the Protocol. The CDM, however, is not just that, it is also intended to help non-Annex I states themselves achieve sustainable development thus contributing to the ultimate objective of the UNFCCC.

The CDM is expected to generate investment in developing countries, especially from the private sector, to enhance the transfer of environmentally-friendly technologies and, thus, promote their sustainable development. Projects of various types are possible under the CDM such as renewable energy, energy efficiency, capture and utilisation of landfill gas and destruction of nitrous oxide and hydroflurocarbons (HFC) from industrial processes via catalysts. A CDM project activity might involve, for example, a rural electrification project using solar panels, the installation of more energy-efficient boilers, or wind farm projects such as the Essaouira wind power project in Morocco that proposed 71 turbines of 850 kilowatts (KW) each, and numerous other activities by other states that followed. The CDM is overseen by an executive board answerable ultimately to the countries that have ratified the Kyoto Protocol. The rationale of the CDM (as is for all the Kyoto Flexible Mechanisms) that, from the global environmental point of view, the place where the emission reduction takes place is of secondary importance provided that real emission reductions are achieved.

The CDM is seen by many as a trailblazer. It is the first global, environmental investment and credit scheme of its kind, providing a standardised, emissions offset instrument, namely CERs. Malta's enthusiasm for climate change initiatives as demonstrated in international fora, its political stability, its readily available human resources and, more recently, its membership of the EU, taken together with the political consensus supporting the deployment of renewable energy projects, undoubtedly presents potential opportunities for investors seeking to invest in Malta. Such opportunities have, so far, gone untapped. There is no doubt of Malta's eligibility to host CDM projects: this is evident even from the last national GHG inventory submitted by Malta to the EU. Nevertheless, only one project has, so far, been submitted to the designated national authority (MEPA) for the necessary approval process. To date, this is the sole local CDM project proposal that is undergoing the CDM process, hence the clear underutilisation of this investment opportunity. No CDM project from foreign investment has, so far, been approved and no reduction credits have been issued as yet for projects carried out in Malta. Neither have any of the local installations used any potential CER credits for compliance under the EU emissions trading scheme. The project design document submitted in respect of the aforementioned project (a landfill gas extraction project at Ta' Zwejra, the interim landfill adjacent to Maghtab landfill) indicates that over the crediting period, the annual average quantity of emission reduction is estimated at around 19, 507 tonnes of carbon dioxide equivalent.

Malta's political will to take on CDM projects has found recent mention in Malta's climate change strategy. Recommendation 05 of the strategy states that "the government should strengthen its strategic, institutional and promotional capacity in order to establish a vibrant Clean Development Mechanism framework in Malta, and in so doing secure a synergy between government entities such as MEPA, EuroMedITI, appropriate government entities and the private sector in order to optimise opportunities available to Malta through the Clean Development Mechanism". The Climate Change Strategy mentions low political risk, good credit rating, favourable investment climate and a sophisticated financial system constitute an advantage for attracting investment and implementing CDM projects in Malta. The possibly higher costs of implementation a CDM project activity in Malta (when compared to corresponding costs in developing countries) is offset by the additional political and commercial security that Malta offers and also by possible incentives for the establishment and growth of businesses in Malta and other opportunities offered to foreign investors under the Malta Business Promotion Act. Malta is also well positioned as a gateway to the Mashreq and Maghreb countries around the Mediterranean and into Africa, where potential CDM opportunities exist.

Emission-reduction project developers, banks, investment firms, brokers, and technology developers among others, have all been indicated as potential participants in the carbon market. Indeed, it is the private sector that has been expected to drive CDM activities. The prediction is that the international demand for CDM credits is bound to increase and Malta will do well if it manages to attract private-interest generated CDM projects to its shores, such as wind farms, thus enticing the transfer to these islands of environmentally-sound technologies and knowhow and, at the same time, allowing Malta to achieve its sustainable development goals. The CDM executive board has defined procedures for accepting projects and encouraging the development of small-scale projects, notably for renewable energy and energy efficiency activities.

Legislation providing for CDMs has been promulgated in Malta via the European Community Greenhouse Gas Emissions Trading Scheme Regulations. The regulations transpose Directive 2003/87/EC and allow Malta to partake in the scheme for GHG emission allowance trading within the Community. The stated scope of the regulations is to promote the reduction of greenhouse gas emissions in a cost-effective and economically efficient manner. If an entity intends to participate in a CDM project activity in Malta, that entity must apply with MEPA for approval of the proposed project activity.

The CDM rules laid down in the Marrakesh Accords (which spell out more detailed rules for the Protocol as well as advanced prescriptions for implementing the Convention and its rules) focus on projects that reduce emissions. Annex I parties are limited in how much they may use CERs from such activities towards their targets – up to one percent of the Party's emissions in its base year, for each of the five years of the commitment period. CDM projects must have the approval of all parties involved. This must be gained from designated national authorities set up by Annex I and non-Annex I parties – MEPA in Malta's case. Projects must lead to real, measurable and long-term climate benefits in the form of emission reductions or removals that are additional to any that would have occurred without the project. CERs may accrue from projects if they meet CDM requirements. A CDM executive board guides and oversees the practical arrangements of the CDM. The Board operates under the authority of the meeting of the parties to the Kyoto Protocol. The executive board has defined procedures for accepting projects and encouraging the development of small-scale projects, notably for renewable energy and energy efficiency activities. CDM projects must be based on appropriate, transparent and conservative baselines (the starting point for measuring emission reductions or removals) and must have in place a rigorous monitoring plan to collect accurate emissions data. These must be devised according to approved methodologies.

CDM project cycle

Participants must prepare a project design document, including a description of the baseline and monitoring methodology to be used; an analysis of environmental impacts; comments received from local stakeholders; and a description of new and additional environmental benefits that the project is intended to generate. An operational entity will then review this document and, after providing an opportunity for public comment, decide whether or not to validate it. When a project is duly validated, the operational entity will forward it to the aforementioned executive board for formal registration. Unless a participating party or three executive board members request a review of the project, its registration becomes final after eight weeks. Once a project is running, it will be monitored by the participants. They will prepare a monitoring report, including an estimate of CERs generated by the project, and will submit it for verification by an operational entity. To avoid conflict of interest, this will be a different operational entity to that which validated the project. Following a detailed review of the project, which may include an onsite inspection, the operational entity will produce a verification report and, if all is well, will then certify the emission reductions as real. Unless a participating party or three executive board members request a review within fifteen days, the board will issue the CERs and distribute them to project participants as requested. Finally, CERs generated by CDM projects will be subject to a levy known as the share of the proceeds. Two percent of the CERs from each project will be paid into the Adaptation Fund to help particularly vulnerable developing countries adapt to the adverse effects of climate change. There is also an additional levy on projects to cover the CDM's administrative costs.

It has already been pointed out that the reduction in emissions of GHGs earned by an Annex I participant function as CER units that can be utilised by installations participating in the EU emissions trading scheme for compliance under Directive 2003/87/EC. This EU initiative came about on the strength of Directive 2004/101/EC and serves to boost CDM at an EU level by providing additional incentives for businesses to engage in these mechanisms. The Directive thereby promotes technology transfer to industrialised countries and to developing countries while reducing the costs of meeting commitments under the EC emissions allowances trading scheme. The Directive sends a strong signal to other parties to the Kyoto Protocol that the Community is fully committed to the Kyoto flexible mechanisms and the advantages that they entail for both the Community and other parties. The core element of the Directive is to provide the recognition of CDM credits (CERs) as equivalent to EU emission allowances (EUAs) for their use within the Community scheme by operators to fulfill their obligations. Linking will increase the diversity of compliance options within the Community scheme thereby leading to a reduction of compliance costs for installations in the scheme. Linking will improve the liquidity of the European market in GHG emissions allowances.

Directive 2009/29/EC presents a number of fundamental changes commencing as from the third trading period starting in 2013. The cap of allowances will be set at an EU-level, decreasing on an annual basis. Auctioning of allowances will be the rule rather than the exception. No allowances will be allocated free of charge for electricity production, with only limited and temporary options to derogate from this rule. The changes envisaged in the said Directive are bound to pose an increase in demand for CDM projects. An increase in demand is also expected as a result of the inclusion of aviation activities in the EU emissions trading scheme commencing in 2012. The aviation sector is subject to an overall cap of so-called aviation allowances (EUAAs) but is expected to be a net buyer of allowances. It is, thus, expected to compete with stationary installations for EUAs. As the overall cap of EUAs decreases and competition for the available EUAs increases, aviation operators may be incentivised to also look at the potential of CERs and ERUs to cover their compliance requirements.

Loss of Malta's non-Annex I status

In contrast with Malta's climate change strategy, the Minister for Resources and Rural Affairs has announced that Malta, following EU accession, seeks to graduate to Annex I party status. It will have to be seen if and when this political statement will see its effective implementation. The question here is whether Malta will remain attractive for CDM involvement if it does lose its non-Annex I status. Firstly, it may be some time before Malta's status is effectively changed to an Annex I state. The political climate must be opportune for this to take place. Until that happens, the opportunity remains. Projects that get approved before the change of status should not lose their CDM character and the benefits derived there under after the change. Secondly, for future projects after any such change, Malta's attractions continue to hold good at a different level: the islands can still serve as a prime location for investors with projects in Africa, either as a place from which to manage operations or as a base for brokers and other intermediaries involved in the carbon market. Malta's political and economic stability coupled with its expertise in related sectors such as banking and finance and other services industries make it ideal for this to occur. Synergising corporate and fiscal advantages and benefits existing under Maltese law (that have been tried and tested) with CDM or other alternatives that have been brought about by climate change may present investors, financiers and other players in the carbon trade with some very interesting opportunities.

Moreover, the opportunities for Joint Implementation (JI) projects (another Kyoto Flexible Mechanism that serves as an alternative to CDM) in Malta remain available for the taking. Through the JI mechanism, a country with an emission-reduction limitation commitment under the Kyoto Protocol may take part in an emission-reduction (or emission removal) project in Malta and count the resulting emission units towards meeting its Kyoto target. JI projects earn emission reduction units (ERUs), each ERU being equivalent to one tonne of carbon dioxide equivalent. As with the CDM, all emission reductions must be real, measurable, verifiable and additional to what would have occurred without the project.

The opportunities are there for the taking. It will, however, have to be the private sector that will need to instigate them into reality and spearhead them forward. There is clear indication that any such initiatives will find the political support of government and the cooperation of the regulator. This should also be considered in the context of the political decision that has been taken to create a physical interconnection of Malta's national grid with the European grid. Given Malta's geographical position, such interconnection will be a major infrastructural project for Malta involving the laying of a submarine interconnector cable between the north of the island and southern Sicily.

The integration of the Maltese grid with the European electricity grid is not only important in that it augments security of supply and the opening of hitherto inaccessible markets: it is also important in the context of fulfilling Malta's renewable energy obligations under the applicable EC acquis. Additionally, the interconnection will make potential major capital projects in Malta (such as the construction of offshore and inshore wind farms and the erection of PV parks in selected areas) that much more feasible.

The authors would like to thank Saviour Vassallo, Environment Protection Officer, Climate Change and Marine Policy Unit within the Malta Environment and Planning Authority (MEPA), for his generous contribution to the formulation of this article.

About the author

Jotham Scerri-Diacono joined Ganado & Associates in 1994 and spent the first 14 years of his practice in commercial litigation. He has, however, since the start of his career, always harboured a passion for the environment and his efforts to develop the environmental law practice of the firm were a natural consequence of that vocation. The author now advises the firm’s corporate clients on all aspects of environmental law as it grows into an identifiable, standalone practice in Malta.

Over the past years, the scope of environmental law advice requested from the firm has been increasingly linked with major energy projects, to the extent that the environmental law practice has come to sit side by side and create synergies with the firm’s energy law practice. Among the major clients served by the author are international pharmaceutical companies, aquaculture and bunkering and energy operators.

Contact information

Jotham Scerri Diacono
Ganado & Associates

171/176, Old Bakery Street, Valletta VLT 09, Malta
Tel: +356  21235406
Fax: +356  21225908
jsdiacono@jmganado.com
www.jmganado.com

About the author

Antoine Cremona is an associate in Ganado & Associates’ litigation department and a member of the firm’s energy law practice. He is one of the G&A lawyers currently engaged in providing legal advice relating to renewable energy, in particular wind energy and photovoltaic installations in Malta.

He advises on regulatory and licensing matters relating to renewable energy projects including offshore wind farm installations and waste-to-energy projects. He has also provided regulatory advice on various issues including access and interconnection and public energy saving schemes.

Antoine is a member of the Lex Mundi Energy Law Practice Group and the Competition Law Practice Groups. 

Contact information

Antoine Cremona
Ganado & Associates

171/176, Old Bakery Street, Valletta VLT 09, Malta
Tel: +356  21235406
Fax: +356  21225908
antoinecremona@
jmganado.com

www.jmganado.com