Clean Development Mechanism • Enables developed countries (known as Annex I countries) to meet their emission reduction commitments in a flexible and cost-effective manner • Assists developing countries (non-Annex I countries) in meeting their sustainable development objectives • Investors benefit by obtaining Certificates of Emissions Reductions (CERs) • Host countries benefit in the form of investment, access to better technology, and local sustainable development

What is the idea of the CDM? • ReduceGHG emissions in one countryto permit an equivalent quantity of GHG emissions in another country, without changing the global emission balance. • Emission Reductions (ERs) must: • Createreal, measurable,andlong-term benefits related to the mitigation of climate change. (KP Art. 12.5b) • Beadditionalto any that would occur in the absence of the certified project activity. (KP Art. 12.5c) • => Integrity and credibility is critical

CO2 Emissions Baseline scenarioCO2 emissions (that would occur) Real, measurable and long-term Additional CO2emissions reduction CDM project CO2 emissions (observable) Years Basic notion of baselines baseline study

CER: A special product • CER is a payment for the Project Developer not to produce • To reduce GHG emissions • Thus, the importance of special requirements • Definition of baselines • Calculation of GHG emission reductions • Monitoring of GHG emission reductions

What is a baseline scenario? • The baseline is the scenario that unfolds in the absence of the project activity • In other words, it is an interpretation of “what would have happened otherwise” • Presumed counterfactual alternative to the proposed CDM project

Additionality • Additionality is the key eligibility criterion in CDM projects • You must do something that you would not have done without the CDM • Two types of additionality • Project Additionality • Environmental Additionality

Baseline methodologies Evaluate • Project Additionality • Methodology (Meth) Panel Recommendation to Executive Board (EB), July 2003 • Environmental Additionality • Marrakech Accords CDM Modalities and Procedures (M&P), COP-7, 2001

Project Additionality • Without the ability to register under the CDM, the proposed project would be, or would have been, unlikely to occur

Project Additionality • Baseline methodology evaluates whether or not the proposed CDM project activity would have gone ahead anyway. • Baseline methodology assesses why the proposed CDM project activity is less likely to occur than one or more of the other possible scenarios.

Project Additionality • A baseline methodology evaluates a priori whether the CDM project activity is the baseline scenario. • CDM project should be considered as a possible baseline scenario since the possibility it would have been implemented in the absence of carbon credits (CERs) must be examined to determine whether it is additional • Baseline methodology must demonstrate that the CDM project activity is additional and therefore not the baseline scenario.

Environmental Additionality • If the proposed CDM project activity is not implemented, a less greenhouse gas friendly activity would have been initiated or continued instead.

Environmental Additionality • A CDM project activity is additional if anthropogenic emissions of GHGs by sources are reduced below those that would have occurred in the absence of the registered CDM project activity. -CDM M&P para. 43 Emission Reductions=hypothetical baseline emissions – effective (project) emissions

Environmental Additionality • Forecast: Baseline Emissions– Project Emissions ___________________ = Emission Reductions (must be >0) • Environmental additionality: if project is expected to generate a positive quantity of ERs.

How to measure ERs? CO2 Emissions monitor using • time indicators and proxy variables baseline emissions (hypothetical, partly monitorable) monitoring plan & calculation concept Additional ERs measure directly • or using emission indicators project emissions (actual) Years

Baseline methodologies Evaluate • Project Additionality • Methodology (Meth) Panel Recommendation to Executive Board (EB), July 2003 • Environmental Additionality • Marrakech Accords CDM Modalities and Procedures (M&P), COP-7, 2001

II. Relevant Studies Needed in a CDM PDD

What are the relevant questions? • Project Design Document (PDD) with Annexes: • What is the baseline scenario? Baseline Study • How to measure the ER? Monitoring Plan • How many ER to expect?  Emissions Reduction Study

Project Design Document • Information on • project • project context • Kyoto Protocol • CDM M&P • etc. Monitoring Plan (MP) Project Design Document (PDD) Project Activity Summary with Annexes: Baseline Study (BLS) Emission Reduction Study (ERS)

III. Baseline methodologies

How to develop CDM baselines?(CDM M&P) (45) A baseline shall be established … • using approved and new methodologies, • in a transparent and conservative manner, • on a project-specific basis, • using simplified procedures for small-scale projects, • taking account of national and/or sectoral policies. (e.g., sectoral reform initiatives, local fuel availability, power sector expansion plans, and the economic situation in the project sector)

How to develop CDM baselines?(CDM M&P) (48)Select baseline method … • that is deemed most appropriate, • that is consistent with guidance from Executive Board, • … and justify the choice.

III.A Procedures to determine Project Additionality

Meth Panel Recommendations to EB, July 2003 • Baseline methodology must include a procedure to assess “why the proposed project CDM project activity” is less likely to occur than one or more of the other possible scenarios.

Meth Panel Recommendations to EB, July 2003 Examples of such procedures • Qualitative or quantitative assessment of different potential options and an indication of why the non-project option is more likely to occur • Qualitative or quantitative assessment of one or more barriers facing the proposed project activity. • Indication that the project type is not common practice (e.g. occurs in less than [<x%] of similar cases) in the proposed area of implementation, and not required by recent/pending legislation/regulations.

Some methods to determine project additionality • Economic / investment analysis • Internal rate of return comparison • Least cost comparison (power projects) • Scenario / barrier analysis • Comparison based on investment risks • Control groups

Investment Analysis • An established and rigorous methodology • An objective method that screens alternatives on the basis of the maximization of the return of investment • The baseline would have the highest IRR or NPV or lowest cost, not taking into account any CER-revenues

CDM project baseline

Economic Analysis of Alternatives CERs Net Present Value 0 CDM Projects Baseline Options

Economic Analysis of Alternatives CDM Project Baseline: Lowest Cost COST Options

Scenario Analysis • Investigates the barriers and risks concerning an investment decision • Types of risks: regulatory, market, development, environmental, project & country risks • Non-economic constraints are the predominant factors for an investment decision • Baseline would be the option with the lowest barriers and risks

Scenario Analysis • Financial / budgetary barriers • Access to capital for project finance • Hurdle rates of third-party investors • Mismatch between investment costs and energy savings • High initial costs and lacking access to credit • Lack of access to foreign capital

Scenario Analysis • Legal barriers • Regulatory biases or lack of regulation • Unclear ownership rights • Technological barriers • Higher perceived risks of new technology • Capacity to absorb new technologies • Lack of trained personnel or technical or managerial expertise • Need to make changes to existing infra to integrate technology

Scenario Analysis • Supply-chain barriers • Lack of adequate supply infra for spare parts, fuels, etc • Lack of transport infra • Market price distortions • Informational barriers • Lack of awareness about available technologies, products, financial support

Scenario Analysis • Barriers due to prevailing practice • Prevailing practice or existing regulatory or policy requirements would have led to implementation of a technology with higher emissions

Scenario Analysis • A thorough analysis of the local circumstances need to be made to justify the baseline selection • Challenge of this method is to provide data and other information that can be validated

Scenario Analysis Important to distinguish between: • Plans and Policies • E.g., Philippine Energy Plan • Project may still be additional even if it meets one of the targets of the plans • Legal Obligations • Project will most likely be not additional if it is carried out to meet legal obligations • Enforceability of Legal Obligations • Project may be additional if enforcement is non-existent

Control group method • Method searches a comparison group that is not offered the opportunity to sell CERs and use their behavior as reference • Finding an appropriate control group is not an easy task, since each group will often face different circumstances. • Baseline is the control group, CDM project is the treatment group

Control group method • Difficulty of finding valid control groups can be overcome if the sample of the control groups is bigger • Difficulty of finding groups which are reasonably homogenous

Combination of Methods No Lower IRR? Higher Costs? Barriers? Not Common Practice? No Not Additional Yes Yes Additional

III.B Procedures forcalculating baseline emissions

Challenge of calculating baseline emissions • Baseline is a counterfactual • What would have happened otherwise if there was no CDM project? • How to forecast the emissions which would have occurred? • How to forecast the emissions which would have happened otherwise if there was no CDM project?

CDM M&P Para. 44 • The baseline of a CDM project activity is the scenario that reasonably represents the anthropogenic emissions by sources of greenhouse gases that would occur in the absence of the proposed project activity

CDM M&P Approaches(Para. 48) • Existing actual or historical emissions • Emissions from a technology that represents an economically attractive course of action, taking into account barriers to investment • The average emissions of similar activities, in previous 5 years, in similar social, economic, environmental circumstances, and whose performance is the top 20% of their category

Meth Panel Recommendation,no. 15, July 2003 • Since only one approach should be chosen in accordance with paragraph 48 of the CDM M&P, developers are advised to select the one that most closely reflects the process used for calculating baseline emissions or baseline emission rates.

Meth Panel Recommendationno. 15 & 16, July 2003 • Process used for project additionality determination can be different from the approach used for calculating baseline emissions • Paragraph 48 of CDM M&P apply to the approach used for calculating baseline emissions

III.C Small-Scale CDM Projects Simplified Baseline and Monitoring Methodologies

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