Creating the Carbon Asset: PCF Approaches to Baselines and Additionality

1. Creating the Carbon Asset:PCF Approaches to Baselines and Additionality Sao Paulo, Brazil November 20-22, 2002

2. PCF Project Cycle Preparation and Review of the Project Project Completion Preparation of project documents (PDD, BLS, MP, ERS) Periodic Verification and Certification Validation Process Construction and Start-Up Negotiation of Project Agreements

3. Part IWhat is a Baseline?

4. A Baseline… …represents the most likely course of action and development in the absence of the project …is a counterfactual future development that provides the same services as the proposed project ….can never be directly observed …is the benchmark against which project CO2e emissions are compared to estimate reductions achieved

5. It is not necessarily continuation of the status quo CO2 Emissions Baseline scenario CO2 emissions (that would occur) Additional CO2emissions reduction CDM project CO2 emissions (observable) Years

6. Kyoto Protocol Requirements Emission Reductions (ERs) must: Create real, measurable, andlong-term benefits related to the mitigation of climate change. (Art. 12.5b) Be additional to any that would occur in the absence of the certified project activity. (Art. 12.5c)

7. Why is additionality important? Joint Implementation Emissions Trading CDM Hot Air? Country A Country B

8. Baseline and additionality:two related concepts If the project equals the baseline scenario, the project is not additional. also: The project is additional if it reduces the amount of emissions vis-a-vis the baseline scenario.

9. Part IIKey Project Documents Required by the PCF

10. Key Documents and their Objectives Project Design Document (PDD) Project Activity Summary and Annexes: • Baseline Study (BLS) What is the most likely future scenario? Why will the project not be implemented without carbon finance, or without the participation of the PCF? (additionality) • Monitoring Plan (MP) How will the emission reductions be measured? What will be measured during the course of the project? • Emission Reductions Study (ERS) How may emission reductions are expected during the crediting period?

11. Baseline Study

12. How to figure out what baseline emissions are? • Beliefs about what would happen are a starting point  Possible baseline scenarios • but beliefs are not sufficient: a methodological approach is needed, which can be tested  Various baseline methods _____________________________________  Determine the relevant baseline scenario

13. How to structure baseline studies? Criteria for baseline method selection, In future: EB list of approved methodologies Information about: • project • data • project context • Kyto Protocol • etc. Possible baseline methodologies Selection of baseline methodology Possible baseline scenarios Selection of baseline scenario

14. An Example • Proposed Project: methane recovery at a landfill • Possible Scenarios • BAU: no methane recovery • Installation of 10 landfill gas wells as safety curtain • Project: Installation of 100 landfill gas wells • Possible Baseline Methodologies • Financial Analysis / inversión • Scenario Analysis Selection of relevant baseline scenario

15. What is a baseline methodology? A baseline methodology is an application of one of the approaches outlined in para 48, Marrakesh Accords. (48a)“existing actual or historical emissions” (48b) “economically attractive course of action” and “taking into account barriers to investment” (48c) “average emissions of similar activities, in previous 5 years, similar circumstance, top 20% performance” Project proponents have to justify their approach…

16. Which baseline methods has the PCF applied to date? • Project-by-project methods • Investment / financial analysis  Latvia, Chile, Colombia, Costa Rica • Scenario analysis  Nicaragua, Uganda • Control groups  Latvia • Expert opinion  Uganda • Standard-oriented methods (small projects) • Technology penetration threshold El Salvador • Technology standard  Mauritius

17. Investment analysis is a rigorous approach ... • Behavioral assumption: • Rational investor maximizes return on investment under given constraints: financial analysis • Public decision maker maximizes public benefit under given constraints: economic / cost-benefit analysis • Baseline definition: • The baseline is the (time dependent) investment alternative (scenario) with the highest IRR or the highest NPV or the lowest costs (all risk adjusted). • not considering GHG emissions or the value of ERs.

18. … and an established methodology … • Distinguish between private and public sector projects. • Create a menu of investment alternatives (scenarios) • that deal with the problem on hand / satisfy an identified demand (service equivalence). • include only plausible scenarios (constraints) • include zero investment scenario (BAU) and proposed project • Include alternative investment start times • Determine investment constraints and parameters (regulatory policy, costs, risks, etc. – but not ERs).

19. How has the PCF applied investment / financial analysis? Example: Latvia – solid waste management • Treated as a private sector investment • Plausible investment scenarios were described and analyzed by Task Manager in a feasibility study • Financial IRRs were provided • Ranking of alternatives with and without carbon value • Baseline: highest IRR without carbon value • Project: highest IRR with carbon value

20. PCF project Baseline

21. Other Baseline Methodologies Scenario Analysis • Attempt to understand and describe all aspects and circumstances that contribute to an investment decision, in particular risks and other barriers • Provide data and/or expert opinions and references that can be confirmed by a validator. Control Groups • The selected control group is the baseline: Describe the baseline! • Must be similar in all aspects but for the CDM project

22. Sections of the BLS • Project description and characteristics • Sector background etc. • Boundaries • Selection of baseline method • Possible alternative scenarios (to include BAU & project) • Legal and other constraints • Selection of plausible alternative scenarios • Application of selected baseline method and determination of the most likely baseline scenario • Discussion of time dimension of baseline and crediting period • Leakage (and Permanence for sequestration projects) • Greenhouse gases covered • Environmental and social impacts • => Complete description of determined baseline scenario and its development over time

23. Monitoring Plan

24. The Monitoring Plan… … describes how to measure the emission reductions resulting from the project … defines the monitoring obligations of the project operator ... becomes operational after project start … serves as the basis for the verification of emission reductions ... is a legally binding document

25. The MP also contains spreadsheets to calculate the ERs Sub-Project Name: Date: Hours Day Unit Equation 1 … 24 Sum (hours) Carbon Intensity Factor t CO2 / MWh A -- Reported Power Supply MWh B Emission Reductions t CO2 C = (A * B)

26. Emission Reduction Study

27. The Emission Reduction Study… … Uses MP calculation tool (spreadsheet) to calculate baseline emissions, project emissions and ERs. … projects expected baseline and project emissions and ERs for each crediting year … provides structured risk information by simulating ER calculation (sensitivity analysis) … provides the basis for informed negotiations

28. Baseline Exercise

29. Annex I:Kyoto Protocol and Marrakech Accord on baselines and monitoring

30. COP-7 – defined baseline for CDM (44)The baseline is the scenario that: • “reasonably represents GHG emissions that would occur in the absence of the proposed project activity”, • “covers emissions from all gases, sectors, sources in Annex A within project boundary”, • is derived using an approved baseline method.

31. How to develop CDM baselines? (45)A baseline shall be established … • using approved and new methodologies, • in a transparent and conservative manner, (c) on a project-specific basis, (d) using simplified procedures for small-scale projects, (e) taking account of national and/or sectoral policies. (48)Select baseline method … • that is deemed most appropriate, • that is consistent with guidance from Executive Board, • … and justify the choice.

32. COP-7 on CDM baseline approaches (48a)“existing actual or historical emissions” • defines BAU as baseline scenario and • a historic control group as monitoring concept (48b) “economically attractive course of action” and “taking into account barriers to investment” • defines an economic baseline method, such as investment analysis (IRR, least cost etc.) (48c)“average emissions of similar activities, in previous 5 years, similar circumstance, top 20% performance” • defines build margin as baseline scenario and • a standard control group as monitoring concept

33. What is the CDM crediting period? Either: (a) Either a maximum of ten years with no option of renewal. Or: (b) Three seven-year renewal periods (total of 21 years). Condition for renewal: Original project baseline is still valid or has been updated taking account of new data.

34. COP-7 on Monitoring The monitoring plan must provide for the collection of all data necessary for • estimating or measuring project emissions • determining the baseline of emissions The monitoring plan must describe the formulae used to • calculate and to estimate project emissions • calculate and to project baseline emissions

35. http://www.unfccc.org/cdm The relevant COP7 texts and information on the sessions and decisions of the CDM Executive Board are available at

36. Annex II:PCF approach towards projects at an advanced stage of preparation

37. Criteria for project eligibility A project will not be eligible for consideration for PCF Financing unless the project sponsor is able to show that it has taken into account the opportunities presented by JI/CDM in the structuring of its financing and is aware of the requirements of these mechanisms including environmental additionality. The project sponsor may demonstrate this by providing evidence of, among other things : 1. Contacts and substantive discussions with potential buyers of ERs prior to the conclusion of the financial package; OR 2. Exploration of the environment additionality of the project, e.g. by the initiation of a baseline assessment.