Baselines and Additionality

Training Seminar for BioCarbon Fund Projects September 12-14, 2005. Washington D.C. Baselines and Additionality Lucio Pedroni - STC World Bank Carbon Finance Business This presentation is based on materials prepared by Lasse Ringius

Contents • The basic concepts underlying the CDM • Approval process of new methodologies • Approaches to A/R CDM baseline methodologies • Determination of the carbon benefits of an A/R CDM project activity • Additionality & Additionality tool

Concepts underlying the CDM • ReduceGHG emissions (or enhance removals by sinks)in one country to permit an equivalentquantity of GHG emissions in another country, without changing the global emission balance. • The Clean Development Mechanism is a baseline-and-credit trade mechanism (not a cap-and-trade mechanism).

Basic requirements of emissions reductions or removals under the CDM • Create“real, measurable, andlong-term benefits related to the mitigation of climate change” (KP, art. 12.5b) • Be “additional to any that would occur in the absenceof the certified project activity” (KP, art. 12.5c) • Be certified by operational entities designated by the Conference of the Parties (KP, art. 5)

Implications Key-word: Implication for A/R CDM: • real, measurableMonitoring (methodology + plan) • long-term Expiring CERs to deal with the non-permanence of C storage • additional BAU activities not eligible; must be direct human-induced • in the absence of the  Baseline (methodology + project activity assessment) • certifiedValidation, Verification and Certification by accredited operational entities, EB…)

CoP-7 defined baseline for CDM MA CDM (44) The baseline is the scenario that: • “reasonably represents GHG emissions that would occur in the absence of the proposed project activity”; • is derived using an approved baseline methodology. MA CDM (45) The baseline shall be established: • (b) “in a transparent and conservative manner” regarding the choices of approaches, assumptions, …” • (c) “on a project-specific basis”; • (d) in accordance with simplified procedures for small scale projects.

CoP-9: Mutatis mutandis for A/R CDM the sum of the changes in the carbon stocks in the carbon pools within the project boundary MA CDM (44) The baseline is the scenario that: • “reasonably represents GHG emissions that would occur in the absence of the proposed project activity”; • is derived using an approved baseline methodology. MA CDM (45) The baseline shall be established: • (b) “in a transparent and conservative manner” regarding the choices of approaches, assumptions, …” • (c) “on a project-specific basis”; • (d) in accordance with simplified procedures for small scale projects (< 8 Kt CO2e/yr).

Approved methodologies • So far, no baseline or monitoring methodology has been approved for A/R CDM project activities. • 13 methodologies have been proposed, 5 have not been approved, 8 are under evaluation and 3 are rated B. • The term “baseline methodology” is somewhat misleading as the EB actually requires to address the following items: • Eligibility of the activity and of the land • Baseline • Additionality • Project scenario • Leakage • Net anthropogenic GHG removal by sinks

Eligible activities C/ha C/ha C/ha Deforestation Reforestation Afforestation > 50 years time time time In the LULUCF sector during the first commitment period (2008-2012) only afforestation and reforestation are eligible project activities.

Eligible activities C/ha C/ha time time Reforestation Reforestation 31.12.1989 31.12.1989 Not CDM eligible CDM eligible First commitment period Afforestation

Eligible lands - Area: 0.05 – 1.0 ha- Crown cover: 10 – 30 %- Tree height: 2 – 5 m A/R project activities are eligible for the CDM only if they occur on lands that were without forest on 31.12.1989 (= “Kyoto land”). What is a CDM forest? Each host country decides, but must use these parameters Taking this decision is a CDM participation requirement. Assessment method is part of the baseline methodology.

DOE: Checks the methodology Approved methodology New methodology Experts EB evaluates methodology Approval of the methodology DOE validates the full PDD A/R WG EB examines the validated PDD DOE can finalize the validation of the PDD Yes No Request for revision (8 weeks) Yes No EB registers the new methodology Yes No Approval of the project EB registers the new project EB reviews the PDD (max. 2 meetings) Approval process of A/R NBM & NMM methodologies & PDDs Preparation of (draft) PDD and (if the B or M methodologies are new) of AR-NMB + AR-NMM

4 months Timing of the approval process of A/R NBM & NMM methodologies

Baseline approaches for A/R projects(Decision 19 CoP-9) (22a) “Existing or historical, as applicable, changes in carbon stocks in the carbon pools within the project boundary” A baseline methodology must be developed using one of the following approaches: (22b) “Changes in C stocks in the pools within the project boundary from a land use that represents an economically attractive course of action, taking into account barriers to investment” (22c) “Changes in carbon stocks in the pools within the project boundary from the most likely land use at the time the project starts”

How to select the baseline approach? (22a) “Existing or historical, as applicable, changes in carbon stocks in the carbon pools within the project boundary” • Data are available to determine the existing or historical changes in carbon stocks. • It can be shown that the prevailing land use (BAU) is not expected to change in absence of the project (but carbon stocks can change!). • Predetermines a historical control group baseline methodology. (22b) “Changes in C stocks in the pools within the project boundary from a land use that represents an economically attractive course of action, taking into account barriers to investment” • Data are available for economic comparison of different land-use alternatives. • It can be shown that land use decisions are mainly driven by economic factors, and that change in such factors may trigger a change in land use. • Predetermines an economic baseline methodology, such as investment analysis (IRR, least cost etc.)

How to select the baseline approach? (22c) “Changes in carbon stocks in the pools within the project boundary from the most likely land use at the time the project starts” • This approach is seen by many observers as similar to approach (a), but applicable where land-use change is expected to occur (in absence of the project). • Could also be interpreted as a statistical approach, whereby the likelihood of prospective land uses within the project boundary is estimated (e.g. from a sample taken from a standard control group)

CFB definition of baseline • The baseline scenario is the most likely land use and land coverdevelopment over time within the project boundary. It includes a conservative and transparent estimation of the sum of the changes in the carbons stocks in the carbon pools accompanying any such LULC development. • The baseline scenario can include development alternatives that may be realized during the project crediting period, if such developments can reasonably be anticipated. • The baseline scenario is not a total quantity of carbon conserved, or an unit expression of sequestration (such as X tC/ha/yr), in the base case.

Project carbon Carbon PROJECTION PROJECTION Additional carbon Baseline carbon Time BASELINE STUDY Project crediting period Only the “additional carbon” has a potential market value. Baseline study – ex ante = Estimation of what may occur under the CDM ex ante = Estimation of what would otherwise occur ex ante

Project carbon Carbon FACT COUNTER-FACTUAL Baseline carbon Monitoring Time Project crediting period Monitoring – ex post = Estimation based on ex post measurements in situ expost ex ante ex ante = Estimation based on ex ante (“frozen”) estimation or on ex post measurements in or ex situ (monitored baseline) - depending on the methodology. expost ex ante ex ante

Project Area Nearby the Project Area 2005 2005 2005+X 2005+X C C Leakage Leakage = Increased GHG emissions outside the project boundary attributable to the project activity (e.g. induced land use/cover change, increased consumption of fossil fuels) and measurable. CO2 The method to be used to assess leakage is part of the “baseline” methodology.

“Net anthropogenic GHG removal by sinks” = emissionsnot considered! Outside the project boundary, “attributable” and “measurable” Within the project boundary Carbon benefits of A/R CDM project activities = “Actual net GHG removal by sinks” = “Baseline net GHG removal by sinks” = “Leakage” Baseline scenario (changes in the carbon stocks in the carbon pools) Project scenario (changes in the carbon stocks in the carbon pools) (decrease in the carbon stocks in the carbon pools) increasein project emissions increasein emissions “Not permanent”! “Permanent”!

Additionality Two basic options for judging additionality: 1. Qualitative: A project activity is “additional” or “not additional”. Accordingly it gets 100% or 0% of the carbon credits. 2. Quantitative: Additionality is assessed probabilistically and carbon credits are awarded accordingly. Under the Kyoto Protocol “additionality” is a “yes” or “no” judgment.

EB10: “Additionality Tools” Examples of tools that may be used to demonstrate that a project activity is additional and therefore not the baseline scenario include, among others: (a) A flow-chart or series of questions that lead to a narrowing of potential baseline options. (b) A qualitative or quantitative assessment of different potential options and an indication of why the non-project option is more likely. (c) A qualitative or quantitative assessment of one or more barriers facing the proposed project activity (such as those laid out for small-scale CDM projects). (d) An 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 a Party’s legislation / regulations.

CDM Additionality Tool (EB 16, Annex 1) PASS PASS PASS PASS Step 3. Barrier analysis Step 2. Investment Analysis OR PASS PASS Step 4. Common practice Step 5. Impact of CDM registration PROJECT ACTIVITY IS ADDITIONAL Step 0. Preliminary screening based on the starting date of the project activity Step 1. Identification of alternatives to the project activity consistent with current laws and regulations

A/R CDM Additionality Tool (AR WG 4, Annex 1 - Draft) Step 0. Preliminary screening based on the starting date of the project activity PASS Step 1. Identification of alternatives to the project activity consistent with current laws and regulations PASS PASS PASS Step 3. Barrier analysis Step 2. Investment Analysis OR PASS PASS Step 4. Common practice Step 5. Impact of CDM registration PROJECT ACTIVITY IS ADDITIONAL Step 4. Common practice

A/R CDM Additionality Tool (AR WG 4, Annex 1 - Draft) Step 0. Preliminary screening based on the starting date of the project activity PASS Step 1. Identification of alternatives to the project activity consistent with current laws and regulations PASS PASS Step 3. Barrier analysis Step 2. Investment Analysis OR PASS PASS Step 4. Impact of CDM registration PROJECT ACTIVITY IS ADDITIONAL

Purpose and Role of the Additionality Tool • The purpose of the additionality tool is to check the claim of additionality and ensure that baseline activities do not receive CERs. • The additionality tool is guidance that can be used for new methodologies: Project developers must either include the additionality tool in the new methodology, adapt it to the specific case, or propose alternative tools. Additionality tool and approved methodologies: • In the future, the A/R additionality tool may have to be used in conjunction with consolidated methodologies (as in the case of ACM0001 – waste, ACM0002 – renewables). • Approved methodologies will not be affected by changes of the additionality tool.

A/R CDM Additionality Tool (AR WG 4, Annex 1 - Draft) Step 0. Preliminary screening based on the starting date of the project activity PASS Step 1. Identification of alternatives to the project activity consistent with current laws and regulations PASS PASS Step 3. Barrier analysis OR Step 2. Investment Analysis PASS PASS Step 4. Impact of CDM registration PROJECT ACTIVITY IS ADDITIONAL

Step 0 – Starting date This step is relevant only for project participants whishing to have a crediting period starting prior to the registration of their project activity. Basic requirements: • A/R project activity started between 1 January 2000 and the date of its registration under the CDM. • PDD submitted for registration before 31 December 2005. • Evidence exists that the incentive from the CDM was seriously considered in the decision to proceed with the project activity.

Step 0a – Specific A/R features This second part of step 0 deals with specific features of A/R CDM project activities (and does not appear to be strictly related to additionality). Basic requirements: • Evidence that the land within the project boundary is eligible for A/R CDM project activities. • Evidence that the proposed activity is direct human-induced (not a mere continuation of the pre-project spontaneous processes).

Step 1: Identification of Alternatives (1.a) Define all realistic and credible alternatives to the project activity(s) that can be (part of) the baseline scenario which are available to project participants or similar project developers: • include the proposed project not undertaken as a CDM project, • other plausible and credible land-use alternatives to the project activity deemed appropriate with respect to location, size, funds/expertise requirements, etc., • include continuation of the current situation (if applicable). (1.b) All alternatives considered should comply with applicable legal and regulatory requirements that are systematically enforced. If the proposed project is the only alternative that is in compliance with all regulations with which there is general compliance, then it is not additional.

Step 2 – Investment Analysis Purpose: Determine whether the project activity is economically or financially less attractive than other alternatives, ignoring carbon revenue.  If the project activity is unlikely to be (the most) financially attractive, proceed to step 4 (or perform barrier analysis).

Investment Analysis - options Sub-step 2.a: Determine appropriate analysis method Sub-step 2.b: Apply the appropriate analysis method Option I – Simple cost analysis: Use if project generates no financial benefits other than CDM related income. Option II – Investment comparison analysis: Use financial indicator, such as IRR, NPV, cost benefit ratio, or other including all costs, revenues and incentives/subsidies, and compare with all alternatives. Option III – Benchmark analysis: Use financial indicator and compare with benchmark indicator representing standard returns in the market.

Step 2 – Investment Analysis Sub-step 2.c: Calculation and comparison of financial indicators (only options II and III): - of the project alternative and other alternatives (Option II) - of the project alternative only (Option III) - Include capital costs, operation and maintenance costs, and revenues (excluding CER revenues, but including subsidies/fiscal incentives where applicable). Sub-step 2.d: Perform financial sensitivity analysis(only option II and III)  If the project is unlikely to be (the most) financially attractive, proceed to step 4, or perform barrier analysis.

Step 3 – Barrier Analysis Purpose: Determine whether the project activity faces barriers that prevent its implementation, but not the implementation of at least one of the other alternatives identified in step 1. Sub-steps: 3a: Identify barriers that would prevent the implementation of the proposed A/R project activity and provide evidence of their existence. 3b: Show that barriers would not prevent the implementation of at least one of the alternatives.  If 3a and 3b are not satisfied, the project activity is not additional.

Step 3 – Types of Barriers Investment barriers: • Debt funding not available for this type of project activity; • No access to international capital markets due to real or perceived risks associated with domestic or foreign direct investment; • Lack of access to credit. Institutional barriers: • Risk related to changes in government policies and laws; • Lack of enforcement of forest or land-use-related legislation. Technological barriers: • Lack of access to planting materials • Lack of infrastructure for implementation of the technology.

Step 3 – Types of Barriers Barriers related to local tradition: • Traditional knowledge or lack thereof, laws and customs, market conditions, practices; • Traditional equipment and technology; Barriers due to prevailing practices: • The is the “first of its kind” in the region or country; Barriers due to local ecological conditions: • Degraded soil • Catastrophic natural and/or human-induced events • Unfavorable meteorological conditions • Pervasive opportunistic species preventing regeneration of trees • Unfavorable course of ecological succession • Biotic pressure in terms of grazing, fodder collection, etc.

Step 3 – Types of Barriers Barriers due to social conditions: • Demographic pressure on the land • Social conflict among interest groups in the region where the project takes place; • Widespread illegal practices • Lack of skilled and/or properly trained labour force • Lack of organization of local communities. Note: These barriers are inter alia; the project proponent can identify different types of barriers.

Step 4 – Impact of CDM Registration Purpose: Explain how the CDM registration, and the attendant benefits and incentives derived from this registration, will alleviate the financial or economic hurdles or the identified barriers and thus enable the project to be undertaken. Benefits and incentives: • Net anthropogenic GHG removal by sinks; • Financial benefit of the revenue obtained from t/lCER sales; • Attracting new players who are not exposed to the same barriers, or can accept a lower IRR; • Attracting new players who bring the capacity to implement a new technology/practice; • Reducing inflation/exchange rate risk affecting expected revenues and attractiveness for investors.  If step 4 is not satisfied, the project is not additional.

Thank you! Thank you!

Baselines and Additionality