Baselines and Additionality

Training Seminar for BioCarbon Fund Projects

July 11-13, 2005. Washington DC.

Lasse Ringius. World Bank Carbon Finance Business.

Contents

I. The basic concepts underlying the CDM

II. The CFB approach to project baselines

III. Validation, verification and certification

IV. Kyoto Protocol and Marrakech Accords on baselines, monitoring, verification,

The key concepts underlying the CDM

• Reduce GHG emissions in one countryto permit an equivalent quantity 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).

What is the requirements of the CDM?

• Emission Reductions (ERs) must: – Create real, measurable, and long-term benefits related

to the mitigation of climate change (KP, art. 12.5b)

– Be additional to any that would occur in the absence of the certified project activity (KP, art. 12.5c)

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 method.

MA CDM (45) The baseline shall be established:– “in a transparent and conservative manner”

regarding the choices of approaches, assumptions, …”

– “on a project-specific basis”

COP-7 on CDM baseline approaches

“Existing actual or historical emissions, as applicable” defines BAU as baseline scenario and a historical control group as monitoring concept

“Emissions from a technology that represents an economically attractive course of action, taking into account barriers to investment” defines an economic baseline method, such as investment analysis (IRR, least cost etc.)

“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

Baseline approaches for A/R projects

“Existing or historical, as applicable, changes in carbon stocks in the carbon pools within the project boundary” (22a)

“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” (22b)

“Changes in carbon stocks in the pools within the project boundary from the most likely land use at the time the project starts” (22c)

The baseline scenario is the most likely course of action and development over time.

The baseline scenario can include development alternatives that may be realized at yet unknown points in time, 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.

CFB definition of baseline

CFB approach to baselines and additionality

Carbon (C)

tC/ha/yr seq. (that otherwise would

occur)

Real, measurable and long-termAdditional C

sequestered

Years

CDM project sequestration (observable)

baseline

study

Additionality

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.

The CDM Additionality Tool

“… how a project activity using the methodology can demonstrate that it is

additional, i.e. different from the baseline scenario…”

(9th meeting of the CDM EB).

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 must be used in conjunction with the two consolidated methodologies (ACM0001 – waste, ACM0002 – renewables)

• The additionality tool is guidance that must 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.

• Already approved methodologies are not affected by the additionality tool and can be used as approved.

Step 0 – Starting date

Eligibility criterion for projects that – started construction between 1 January 2000 and first

registration of a CDM project,– submitted for registration before 31 December 2005,– provide evidence that the incentive from the CDM was

seriously considered in the decision to proceed with the project activity.

Claim crediting period starting prior to project registration.

Step 1: Identification of Alternatives

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,– provide output or services with comparable qualities, properties

and application area,– include continuation of the current situation (if applicable),– comply with applicable legal and regulatory requirements that are

systematically enforced

If the proposed project is the only alternative, then it is not additional.

Step 2 – Investment Analysis

Purpose:

Determine whether project is economically or financially less attractive than other alternatives, ignoring carbon revenue.

If the project is unlikely to be (the most) financially attractive, proceed to step 4 (or perform barrier analysis).

Investment Analysis - options

Step #1: Determine appropriate analysis method:1 – Simple cost analysis:

Use if project generates no financial or economic benefits other than carbon revenue (i.e. sale of CERs)

2 – Investment comparison analysis: Use financial indicator, such as (project or equity) IRR, NPV, levelized unit costs, including all costs, revenues and incentives/subsidies, and compare with all alternatives

3 – Benchmark analysis:Use financial indicator and compare with benchmark indicator representing standard returns in the market.

Step #2: Apply appropriate analysis method:

Step 2 – Investment Analysis

Step #3: Calculate and compare financial indicators (only option ii, iii):

Include capital costs, O&M, and revenues (excluding CER revenues, but including subsidies/fiscal incentives where applicable).

Step #4: Perform financial sensitivity analysis (only option ii, iii):

If the project is unlikely to be (the most) financially attractive, proceed to step 4, or perform barrier analysis.

Step 3 – Barrier Analysis

Determine whether project faces barriers that prevent the implementation of this project type or activity, but not implementation of at least one of the alternatives.

Steps:3a: Identify barriers (investment, technological, practice), and

provide evidence.

3b: Show that barriers would not prevent one of the alternatives.

If 3a – 3b not satisfied, the project is not additional.

Step 3 – Types of Barriers

BarriersInvestment barriers:

- Debt funding not available for this type of innovative project activities.

- No access to international capital markets due to real or perceived risks associated with domestic or foreign direct investment.

Technological barriers:

- Skilled and/or properly trained labor not available;

- Lack of infrastructure for implementation of the technology.

Barriers due to prevailing practice:

- The project activity is the “first of its kind”

Step 4 – Common Practice Analysis

Determine whether project type has already diffused in the relevant sector or region.

Steps:4a: Analyze similar activities

4b: Discuss similarities and possible distinctions between project and similar activities

If no essential distinctions can reasonably be explained, the project is not additional.

Step 5 – Impact of CDM Registration

Explain how the CDM registration will alleviate the financial or economic hurdles or the identified barriers and thus enable the project to be undertaken.

Benefits and incentives:– Anthropogenic greenhouse gas emission reductions;

– The financial benefit from selling CERs,

– Attracting new players who are not exposed to the same barriers or hurdles,

– Attracting new players who bring the capacity to implement a new technology,

– Reducing inflation /exchange rate risk affecting expected revenues.

If step 5 is not satisfied, the project is not additional.

COP-7 on monitoring

The monitoring plan must provide for the collection of all data necessary for

(a) estimating or measuring project emissions

(b)determining the baseline of emissions

The monitoring plan must describe the formulae, algorithms used to

(a) calculate and to estimate project emissions

(b)calculate and to project baseline emissions

How to measure ERs?

Carbon

Pre-project sequestration

Additional C

Years

Project (actual):

measure directly

or through

indicators

monitoring plan &

calculation concept

monitor using

time indicators and

proxy variables

baseline sequestration:

(hypothetical, partly

monitorable)

Summary of steps & CFB document system

Project Design Document (PDD)Project Design Document (PDD)

Baseline Study(What is the baseline scenario?)

Baseline Study(What is the baseline scenario?)

Monitoring Plan(How to measure C conservation?)

Monitoring Plan(How to measure C conservation?)

Carbon Conservation Study(How much C to expect?)

Carbon Conservation Study(How much C to expect?)

Unit Equation Jan Feb Mar Apr

Gross electricity production kWh H

Volume of landfill gas sent to engines m3 X

Volume of landfill gas flared m3 C

Volume of landfill gas extracted from baseline wells m3 B

Volume of landfill gas extracted from project wells m3 A

Methane content of landfill gas (based on laboratory analysis)

Y

Generator heat rate kJ/kWh h

Proportion: gas combusted in flares (flare efficiency)

a 0.97 0.97 0.97 0.97

Calorific content of methane GJ/m3 j 0.037 0.037 0.037 0.037

Weight of methane t/m3 e 0.000714 0.000714 0.000714 0.000714

Global Warming Potential of methane

GWP/t f 23 23 23 23

Total energy input to engines GJ I = h*H/1000000 #REF! #REF! #REF! #REF!

Tons of methane combustedin engines

t J = (I/j )*e #REF! #REF! #REF! #REF!

Proportion: Methane in landfill gas (based on power output)

c = J / e * X

Tons of methane combusted in flares

t K = C*a*c*e 0 0 0 0

Proportion: contribution of project wells to total gas

k = (X+C-B) / (X+C)

#DIV/0! #DIV/0! #DIV/0! #DIV/0!

Net amount of methane avoided t M = (J+K)*k #REF! #REF! #REF! #REF!

Emission Reductions t CO2equ N = M*f #REF! #REF! #REF! #REF!

Data input: metered variables (Note: all flow data are monthly aggregates)

Calculation from electricity production (primary method)

Technical parameters

Years

monitoring plan

Years

monitoring plan

Baseline method

Monitoring method

ER Simulation

CFB quality control system

Information on:

• proposed project

• project context

• legal & other constraints & requirement

• country and sector back-ground

• JI/CDM modalities

• etc.

WB Carbon Finance: Internal document review

Experts, Meth Panel, Executive Board: Review and approval of new methodologies

Operational Entity: Verification of emission reductions

Stakeholder Comments

Corrective Action Requests

Final Validation Opinion

Operational Entity: Validation of project design

Validation, Verification and Certification Defined

How does the CFB system for baseline establishment work?

• At Project Information Note stage – Baseline discussions with QA-team

• Preparation of Carbon Finance Document (CFD)– Discussions with project proponent– Possibly reconnaissance missions

• After CFD– Formal Baseline Study– MP– Carbon Conservation Study

• Validation

Why is the MP important?

• creates transparency, reliability, verifiability, and credibility.– Serves as a project-specific performance standard.– Is a performance monitoring and measurement tool.

• provides a consistent and (to be) validated system for the flexible, yet conservative determination of ERs.– performance criteria, observable indicators, measurement

methods, default parameters, technical equations, record keeping systems, ER model and calculation procedures.

• determines clear responsibilities.• can be adapted to a variety of CDM projects.

What does the MP contain?

1. Instructions and indicators for a systematic monitoring and recording of conservation related data for baseline and project case.

2. Models and tools for the calculation of ERs.3. Targets and monitoring instructions for social,

environmental, and development indicators as a measure of sustainable development.

4. Instructions for the management and quality control of the monitoring system.

5. Guidance for the verification of ERs.

Validation

• An independent assessment of project design and compliance with a set of criteria.– Baselines & additionality, boundaries & leakage

– Sustainable development

– Other criteria, e.g., stakeholder participation, environmental impact assessment, host country approval

• Carried out by (accredited) independent private sector entity (validator).

• Successful validation is pre-requisite for project registration by CDM Executive Board (EB).

What are validation prerequisites?

• Full project preparation– technical, political, financial

• Project Design Documents– Baseline Study, MP, Carbon Conservation

Study

• CFB Validation Protocol– Validation guidelines– Table of requirements– Template for validation opinion

Main steps in the validation process

• Selection of accredited environmental auditing company (so-called DOE) by CFB.

• Submission of PDD and project documents.• Validation procedure:

– Desk review of documents.– Interviews, possibly project visit, other evidence.– Input from concerned parties, stakeholder comments.– Draft validation report.– Clarification of issues, adjustment of project design and

documents by CFB, resubmission of documents.

• Final validation report and opinion.

What does project implementation and start or ER production involve?

• Project operator implements MP:– Set up of monitoring system.– Train monitoring and record keeping staff.– Implement quality control system.– Ready to monitor baseline and project performance data.

• Initial Verification:– Accredited operational entity (auditor/verifier), not the same as

project validator.– Verifies & confirms readiness of project and quality management

and assurance system to generate and monitor ERs.– Adjustments to MP if needed (if technical design changes).– Establish relationship with operator.

• CFB clears project for production of ERs.

How is monitoring done?

• Monitoring during operation is responsibility of project operator.

• To be carried out in full compliance with MP.• Read measurement tools, collect and record data,

undertake surveys etc.• Complete self-calculating spreadsheets.• Store records (paper trail).• Report to CFB and host country authorities.• Follow quality management and assurance system.• Prepare for verification.

What does verification involve?

• Periodic assessment and confirmation that project has achieved a quantity of ERs in compliance with MP and relevant project criteria.

• Verifier (operational entity):– audits records, reviews interpretations, checks calculations.

– reviews project performance and confirms (or determines) achieved quantity of ERs.

– reviews continued validity of baseline, if required by MP.

– checks compliance with MP, reviews adequacy of MP.

– assesses proper handling of management, operational and quality assurance system.

– drafts report, requires/suggests corrections, points out risks.

What is certification?

• Verifier issues written assurance (the certificate) that, during the verification period …– the project has achieved stated units of carbon conservation,

– in compliance with all CDM and project performance criteria.

• Certificate is legally binding statement, verifier is liable for professional work.

• Executive Board (or accreditation body) can undertake spot checks – accreditation can be revoked.

Lessons and principles re. eligible methodologies (1)

• Keep the methodology simple. Complex approaches that are difficult to understand and illustrate are not well-received

• Incorporate elements from approved methodologies. CDM methodologies are being developed on a precedence basis, so incorporation of elements from approved methodologies add to the validity and consistency of a new methodology.

• Use multiple additionality tests. A combination of tools – such as market and/or regulatory barriers, economic and financial assessment, and common practice – helps strengthening the claim for additionality.

• Ensure the methodology is conservative. It should be convincingly demonstrated that the methodology is conservative.

• The methodology should reflect project experience: A methodology should be neither too narrow or too broad

• Emphasize the monitoring plan. • Incorporate national policies. The methodology should

incorporate a part that shows how the methodology will take into account national policies and measures.

Lessons and principles re. eligible methodologies (2)

Thank you!

Discussion …