The Concept of The Concept of Incremental CostsIncremental Costs

Typical GEF Projects for Climate ChangeTypical GEF Projects for Climate Change

1. Energy Efficiency (Operational Prog. 5)• Industrial Boilers

• Agricultural Pump-Sets

2. RETs (Operational Prog. 6)• Wind Power, Small Hydro, Biomass Power etc.

3. Low GHG Emitting Technologies (Operational Prog. 7)• PV for Grid Power

• Fuel Cells for Mass Transport Vehicles

Example: Climate ChangeExample: Climate Change (Costs/ emissions during the project life cycle)

Baseline: Coal-fired power station with Conventional Boiler (33% efficiency)

Cost: Rs. 1000 Crore, Carbon: 15 million tons Alternative: Coal Plant with Super Critical Boiler

delivering the same electricity

Cost: Rs. 1100 Crore, Carbon: 13.5 million Tons Incremental Cost: Rs. 100 CroreN.B. There is an incremental cost but no “incremental component.”

Incremental Cost MatrixIncremental Cost Matrix

Global Benefit Mt. Carbon

Domestic Benefit

Cost Rs. Crore

Alternative -13.5 Power Local AQ

1100

Baseline -15 Power

1000

Increment 1.5 Local AQ Improvement

100

IC of mitigation: Rs. 100 Crore / 1.5 MtC = Rs. 667/ tC

Key ElementsKey Elements Additional net costs (not benefits) Always relative to some baseline course of

action Costs incurred as a result of redesigning an

activity, or selecting an alternative activity That alternative can be additional to or

substitute for the baseline plan

Key Elements ..2Key Elements ..2

When the baseline plan is designed to achieve only

national benefits and redesigning or selecting an alternative techn is

made to meet a global environmental objective,

then the incremental cost is that of achieving the

resulting global environmental benefits

Alternate BaselinesAlternate Baselines Assuming the current trend will continue:

current-mix of techn. is projected to continue

ex: dependence on kerosene (lighting) or fuelwood Consider alternatives (fossil fuels) and project

Least-cost-mix

ex: Diesel system (for electricity) or LPG (for cooking)

Consider no-project scenario situation for the project period

Marginal cost of technology should be considered

Alternative ScenarioAlternative Scenario

Select technology (RET or Energy Efficiency)

or

Select alternate institutional arrangement or policy initiative

Which provides the same level or scale of benefit as the Baseline Scenario (MWh or GJ)

Leads to reduction in GHG emission or emissions are fully avoided

Alternate technology or alternate institutions will involve addition cost

Example: Climate ChangeExample: Climate ChangeBiomass Gasifier Based Power Biomass Gasifier Based Power

Generation for an IslandGeneration for an Island

Baseline: A Village is getting electricity from a diesel generator of capacity 1 MW– Capacity: 1 MW– Electricity generation: 5000 MWh / yr

Alternate Scenario: Energy-forest and Biomass Gasifier– Capacity: 1 MW– Electricity generation: 5000 MWh / yr

Incremental Cost-MatrixIncremental Cost-Matrix

Domestic benefits

Global benefit

Cost (life cycle)

Alternative (1 MW)

5000 MWh Local Bemefits

0 30 crore

Diesel (1 MW)

5000 MWh - 20000 tC 25 crore

Increment Local Benefits

- 20000 tC 5 crore

IC of mitigation: Rs. 5 crore / 20000 tC = Rs. 250/ tC

Example: Biological DiversityExample: Biological Diversity Identified Ecosystem

– Priority under Convention on Bio Diversity– Threat

Cause of Threat is (say) Industrial Pollution Solution is Removal of Cause (Incremental) Cost

– Extra cost of same industrial activity with pollution abated

Example Continued Domestic Benefits

– Some fish breeding grounds in the polluted wetland

– Some tourism But, suppose Incremental Cost>>Incremental Domestic Benefit

Grant = IC

Example Continued Baseline: Development of the industry

sector Alternative: Continued development, same

output, but remove the threat Incremental Cost: The extra cost of

achieving the same baseline development

IC = [Cost of A] - [Cost of B]

IssuesIssues Selection of baseline and its justification Selection of Alternate technology / Scenario stating it

will not spread if no project implemented Adoption of technology or Institutional arrangement

involves IC; which is not provided by Govt. / Banks

- Risk associated with Alternate Scenario If any additional benefit; it will be deducted from IC

estimation Use appropriate discount rate and estimate life cycle

cost Sourcing of baseline finance domestically

Baseline Course of ActionBaseline Course of Action

The baseline course of action is what

would normally occur in the project

area in the absence of the proposed

project.

Incremental Cost Approach for Incremental Cost Approach for Climate Change ProjectsClimate Change Projects

If the project falls under OP#5 or OP#6:

– The life-cycle costs of “win-win” Energy Efficiency and RET alternatives < baseline costs

– Incremental costs = barrier removal costs If the project falls under OP#7:

– The barrier is the cost of the technology itself.

– Incremental costs = alternative technology costs - baseline costs

MisunderstandingsMisunderstandings

“Incrementalism”: No radical efforts possible

Inseparability of global and domestic benefits

Impossibility of monetizing environmental benefits

Small transfers of resources Complex

ImplementationImplementation Issues

– Conflict of interest (country, co-financiers)– Length of communication chain– Unpopularity (strategic flaws, difficult concept)– Sensitivity of estimates

Reaching Agreement on Reaching Agreement on Incremental CostIncremental Cost

Choosing the Eligible Objective Negotiating a Reasonable Baseline Estimating the Cost and Ensuring the

Equivalence of the Proposed Alternative Comparing the Cost Streams Discounting the Future Costs

››Agree on incremental cost

Incremental Cost Approach for Incremental Cost Approach for Climate Change ProjectsClimate Change Projects

If the project falls under OP#5 or OP#6:

– The life-cycle costs of “win-win” efficiency and renewable alternatives < baseline costs

– Incremental costs = barrier-removal costs

Incremental Cost Approach for Incremental Cost Approach for Climate Change ProjectsClimate Change Projects

If the project falls under OP#7:

– The barrier is the cost of the technology itself.

– Incremental costs = alternative technology costs - baseline costs

The utility of the incremental cost The utility of the incremental cost approachapproach

Summary of Approach

Incremental

Local

HISTORYHISTORY Cost Accounting

– Incremental cash flow analysis Project Economics

– Incremental benefits > incremental costs Global Environment

– London Amendments to Montreal Protocol (1990)

– FCCC; CBD; GEF Here to stay

MOTIVATIONSMOTIVATIONS Complementarity

– Make a difference– Relieve the “added burden” on project hosts– Obtain replenishment

Project Selection– Developmental expenditure– Global environment protection