Creating the Carbon Asset: PCF Approaches to Additionality, Baselines, Validation and Verification

Contents I.Project Cycle: Overview II.PCF Baseline Development III.Validation, Verification and Certification IV.Conclusions

Part I What are the basic concepts?

What is the idea of the CDM? Reduce GHG emissions in one country to permit an equivalent quantity of GHG emissions in another country, without changing the global emission balance Emission Reductions (ERs) must: –Create real, measurable, and long-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)

What is the PCF Approach to Additionality and Baselines? CO2 Emissions CDM project CO 2 emissions (observable) Real, measurable and long-term Additional CO 2 emissions reduction Years Baseline scenario CO 2 emissions (that would occur)

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

What are baseline scenarios? Baseline scenarios depend on identified (supply/service) problem, not on proposed project: –How can a particular product or service be delivered? –Principle of service equivalence: Comparison with service (e.g. electric power) in the baseline scenario –Examples: electricity production using coal, natural gas, biomass, hydro etc., and heat production using individual boilers, district heating Baseline scenarios establish the emissions that would otherwise occur in the absence of the project, not business-as-usual: –What is the time profile of different technologies? –What is the regulatory and policy framework?

How to measure emissions? Project emission are directly observable / measurable Baseline emissions are hypothetical / counterfactual  But often real time indicators can help tell what would happen  Develop a Monitoring Plan –Take measurements / monitor emission indicators –Calculate / assess baseline and project emissions

How to be sure that emission reductions are real, measurable and long-term? Baseline Study Monitoring and Verification Plan  Validate (before project construction) Monitoring records Emission reduction calculations  Audit / Verify / Certify (during project operation)

Part II How does the PCF determine project baselines?

How does the PCF system for baseline establishment work? At PIN stage –Baseline discussions with PCF team Preparation of PCN –Discussions with project proponent –Possibly reconnaissance missions After PCN –Formal Baseline Study –MVP –Validation

What is the purpose of the baseline study? The baseline study –Is a systematic and methodological analysis to determine the most likely development scenario and its evolution in time in absence of the Kyoto Protocol mechanisms. –Is the basis for the projection of emission reductions. –Credibly demonstrates environmental additionality. –Provides all arguments, facts and evidence in support of the determined project baseline, so that the baseline can be validated.

PCF baseline process Information on  project  project context  Kyoto Protocol  etc. Possible baseline methods Baseline method selected Plausible baseline scenarios Baseline scenario selected Criteria for baseline method selection Monitoring and Verification Protocol Emission Reduction Study

Which baseline methods has the PCF applied to date? Project-by-project methods –Investment / financial analysis  Latvia, Morocco, Chile –Scenario analysis  Uganda –Control groups  (Brazil, Latvia MVP) –Expert opinion  (Uganda BLS) Standard-oriented methods –Sectoral baselines, emission factors,  (Costa Rica, Chile) benchmarks –Technology matrix, default baselines, Top-down baseline,... Hybrid methods –Political guidance on key parameters –Guidance on how to treat policy decisions (policy baselines)

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.

… 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).

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 and Economic IRRs were provided Ranking of alternatives with and without carbon value Baseline: highest IRR without carbon value Project: highest IRR with carbon value

Baseline PCF project

How has the PCF applied the least cost method? Examples: Morocco, Chile A public (Morocco) or a private (Chile) sector project? A comparison of investment alternatives on the basis of cost per kWh is typically used in power projects planning. The PCF methodology examines the: –Expansion plan: Additionality of investment What is the next system expansion? What is the system’s long-run marginal cost? When would the proposed project be implemented? –Dispatch model: Emission reductions Which power source is displaced at the operating margin? MVP bases verifiable ERs on observed dispatch.

Chile: 5 th Region Generation and Dispatch to Meet Future Demand (to scale) GWh Year New 300 MW CC plants

Scenario analysis is difficult Not very well defined as a methodology. Use if non-economic constraints are predominant Employ a multi-dimensional, risk-based scenario analysis, to identify most likely course of development Attempt to understand and describe all aspects and circumstances that contribute to an investment decision, in particular risks and other barriers Combine with other methods if available (e.g. costs) Provide data and/or expert opinions and references that can be confirmed by a validator. Note: The project proponent’s or consultant’s beliefs or simple statements cannot be validated.

Example: Uganda – small scale hydropower Options: –Business as usual: diesel gen-sets –Local hydropower –Grid connection Barriers –Investment risks –High costs –Market structure / demand –Weak institutions How has the PCF used scenario analysis?

Example: Uganda – small scale hydropower Undertake multi-dimensional, risk-based scenario analysis –Investment risks (expert opinion), cost analysis, market structure Analysis identifies and describes reasons, why –grid extension is currently not a feasible option –hydro development is too risky to occur without intervention –current situation (small gensets) is least risky and would persist:  baseline Baseline study backs these findings with “confirmable” information (e.g., expert opinion) MVP checks if baseline study claims remain valid –Indicators for grid extension and major fixed-asset investment in West Nile region

How to use control groups? Two types of control groups –Different group of consumers or facilities that are not involved in and/or affected by the CDM project –Same group of consumers or facilities before implementation of proposed project (historic baseline) Control group must be situation-specific –The selected control group is the baseline: Describe the baseline! –Must be similar in all aspects but for the CDM project –Often complicated, but can be combined with other methods –Useful for projects with large number of units (e.g. households)

How to use control groups? Cont’d MVP to measure critical control group indicators –If possible, use observed control group emissions as baseline emissions –Combine control group data with other relevant data in project area, such as activity level Distinguish two questions: –What is quantity of baseline emissions? Decreasing baseline emissions as members of control group switch to new technology? Replace new technology in control group with old technology? –When does the baseline shift? How many members of control group have to switch?

How has the PCF used control groups? Control groups often used to project and measure baseline emissions and ERs –Uganda: Survey of private gensets and electricity demand for projection of growth (BLS) –Latvia: When will landfill gas be used for power generation? (MVP) –Uganda: When does a major non-removable investment occur in the region. (MVP) –Brazil: Historical trends for fuel switching (BLS), ten peers in the industry to measure emissions from charcoal production (MVP)

How would standard-oriented baselines work? Objective: –simplify baseline determination for project developer –reduce transaction costs and risks for investor –control gaming Tool: –public provision of pre-approved baselines for project categories –not yet available Philosophy: –additionality “on average” –political decision (equity, development priorities) –research and pilot application in concrete projects

For instance benchmarks … Prepared for fairly homogeneous category of projects / technology / circumstances, a sector, power grid etc. Often based on activity level / efficiency –For instance: baseline benchmark in kg coal/kWh Methods –historic: average energy efficiency in power sector (last five years) –present: efficiency of latest addition to grid –projection: expected technology –Country/region-specific: local circumstances, energy policies etc. Needs proof that –benchmark is applicable, because project falls in project category

Has the PCF used standard baselines? Example: Costa Rica – small scale renewables Sector-wide analysis supports small independent power projects (sub-projects, SP) –Sector BLS: Develops cost criterion: System-wide long-run marginal cost (LRMC) benchmark based on characteristics of national power system and expansion plan –Sector MVP: Calculates carbon intensity factor (CIF): Weighted average carbon intensity of displaced power based on observed dispatch behavior or least cost dispatch analysis Simplified approach for each SP: –SP-BLS: Generation cost > sector LRMC  SP additional –SP-MVP: kWh supplied by SP x CIF  ERs from SP

Finally: What emerges … … is a complex picture: –No single, but a hybrid mixture of methods –Complexity depends on project design –Unsolved political issues Baseline study and MVP must be seen together –More or less rigorous, method-driven forecasts in the baseline study – as a basis for –selection and application of monitoring tools for baseline and project emissions in the MVP More experience and discussion is needed! –PCF contribution to evolutionary concept for baselines etc.

Part IV: Validation, Verification and Certification

Why is the MVP important? creates transparence, 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 for all parties. can be adapted to a variety of CDM projects.

What does the MVP contain? 1.Instructions and indicators for a systematic monitoring and recording of emissions related data for baseline and project case. 2.A 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.

What do we mean by validation? An independent assessment of project design and compliance with a set of criteria. –Baseline/additionality/leakage –Sustainable development –Other criteria, e.g., stakeholder participation, environmental impact assessment, host country approval Carried out by qualified (accredited) independent private sector (operational) 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 –most important: Baseline Study and MVP PCF Preliminary Validation Protocol (PVM) –Validation guidelines –Table of requirements –Template for validation opinion

How does the validation process work? Selection of independent validator by PCF Submission of project documents Review and amendment of Validation Protocol –Revised rules and modalities? Validation procedure –Desk review of documents –Interviews, possibly project visit, other evidence –Input from concerned parties –Draft validation report –Clarification of issues, adjustment of project design and documents by PCF, resubmission of documents Final validation report and opinion

What does project implementation and start or ER production involve? Project operator implements MVP –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 –Qualified (accredited) independent private sector (Operational) Entity (auditor/verifier), not project validator. –Verifies & confirms readiness of project and quality management and assurance system to generate and monitor ERs –Adjustments to MVP if needed –Establish relationship with operator PCF 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 MVP Read meters, collect and record data, undertake surveys etc. Complete self-calculating spreadsheets Store records (paper trail) Report to PCF 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 MVP 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 MVP, –checks compliance with MVP, reviews adequacy of MVP –assesses proper handling of management, operational and quality assurance system –drafts report, requires or suggests corrections, points out risks

What is certification? Verifier issues written assurance (the certificate) that, during the verification period, –the project has achieved stated ERs, –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.

How do we receive emission reductions? Who reports? Verifier informs CDM Executive Board and project participants of successful certification and delivers certificate. Executive Board issues certified emission reductions (CERs) into national registries. PCF Participants receive CERs in their accounts in national registries. PCF and host country report periodically to UNFCCC Secretariat and/or CDM EB.

Thank you!

Annex What does the Kyoto Protocol say about baselines?

The Kyoto Protocol on Baselines Criteria for CDM projects: –Real, measurable, and long-term benefits related to the mitigation of climate change. (Art. 12.5b) –Reduction in emissions that are additional to any that would occur in the absence of the certified project activity. (Art. 12.5c) Modalities / guidelines elaborated by the Conference of the Parties.

COP7 – 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

How to develop CDM baselines? (45) A baseline shall be established: (a)using approved and new methodologies (b)transparent and conservative manner (c) project-specific basis (d) simplified procedures for small-scale (e) national and/or sectoral policies (48) Select baseline method: –deemed most appropriate –guidance by Executive Board –justify choice

COP7 on CDM baseline methods (48a) “existing actual or historical emissions” + (46) “future emissions can rise above current levels” (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”

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.

COP7 modalities for JI baselines “Second (slow) - track JI”: very similar to CDM But no specific guidance on baseline methodologies – except: A baseline shall be established –on a project-specific basis –or using a multi-project emission factors Opportunities for simplification –Develop emissions factors, in particular for very small and typical projects and for ESCO (energy savings) projects

Is “Fast-track JI” the Magic Bullet? “First (fast) - track JI”: similar to emissions trading Host country must meet all requirements for emissions trading (Art. 17), in particular inventory, registries, compliance reserve Baselines are necessary but no specific methodology provided No validation (= “determination”) necessary Host country verifies! – and then issues ERUs No supervisory committee review  Can we simply agree with host country government on quantity of “AAU/ERUs” for a specific activity?

The relevant COP7 texts and information on the sessions and decisions of the CDM Executive Board are available at