CDM Methodology World Bank Carbon Finance: Interpretations and Approaches to Baselines, Monitoring and Calculation of Emission Reductions Bonn, 6 June 2003 Johannes Heister – PCF, Carbon Finance Unit, World Bank

Assumptions and Principles Know what we want to achieve. –Do we have a common understanding of the objective? The world is a well-structured, intelligible place. –Are we able to understand and predict human actions and developments through analysis and synthesis? Information (facts) plus rationality (reasoning). –Are we able to collect a complete set of relevant observations and produce consistent arguments? Methodologies reduce complexity and need for judgments. –Methodologies must have discriminatory power, but how do we choose the “right” methodology? Keep a skeptical mind. –Are we willing to correct predictions on the basis of new observations?

PCF baseline and monitoring philosophy Produce highly credible ERs –carry a public premium: they promote the CDM –lack of integrity can damage the CDM. Experiment! –find out what works: as a methodology and for the CDM as a market based instrument (reasonable requirements) –with transparency, methodological rigor and intellectual honesty (prototype) –evolutionary approach: be ready to change course Political dimension –Baseline methods can have distributional implications –political guidance therefore necessary (EB, Parties)

What are the basic concepts?

What is the PCF approach to additionality and baselines? CO2 Emissions CDM project CO2 emissions (observable) Real, measurable and long-term Additional CO 2 emissions reduction Years Baseline scenario CO2 emissions (that would occur) baseline study

Emission Reductions: Genesis of a seemingly simple idea Additionality: criteria investment program financial regulatory technological emissions Baseline: methods project specific standard baseline 1995: Activities Implemented Jointly (AIJ) pilot phase ? Projects  Emission Reductions 1997 Kyoto Protocol: “Reductions in emissions that are additional to any that would occur in the absence of the certified project activity.”

Emission Reductions: Genesis of a seemingly simple idea Additionality of a project Baseline scenario project specific 2001: Marrakech Accord: “Environmental additionality”: = emission reductions Baseline: = scenario that represents emissions … Another interpretation: Emission reductions estimate Emissions baseline sector wide ? standard ? Additionality (of a technology)

Emission Reductions: Genesis of a seemingly simple idea Emissions baseline Ex ante projection, conservativeness Project additionality “but-for” test? 2003: Project Design Document: “Project additionality”: “Description of how the baseline methodology addresses the calculation of baseline emissions and the determination of project additionality” 5 th Methodology Panel: “Emissions baseline”: Ex post calculations of baseline emission rates shall not be used. The baseline emission rates must be calculated and reported ex ante. Emission reductions calculation

Issues Project versus environmental additionality: => but-for test or “stylized” baseline methodologies? Ex ante factors & conservativeness: => or monitoring and ex post factors Scope of methodologies => role of Operational Entities PDD Format

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” What is a baseline ??

Scenario defined Webster’s dictionary: –A sequence of events especially imagined. –An account or synopsis of a possible course of actions or events. WB CF definition:  The the most likely course of action and development over Baseline scenario defined

 The relevant 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 an emissions baseline (such as an emissions factor). PCF – baseline scenarios defined:

How to measure ERs? CO2 Emissions project emissions (actual) Additional ERs Years baseline emissions (hypothetical, partly monitorable) monitoring plan & calculation concept monitor using  time indicators and proxy variables measure directly  or using emission indicators

Why is a monitoring methodology important? More information on how a baseline scenario develops becomes available over time. (Increased credibility) The monitoring concept can deal with issues that the baseline study cannot address. (Reduced complexity) A good monitoring concept ensures the credibility and verifiability of the maximum number of ERs. (Less conservative)

Two components of monitoring plans 1.Emission reduction calculation concept –Rational and assumptions –Variables, parameters, formulae 2.Instructions for data collection ===> For project – and for baseline, too?

Baseline scenario Calculation concept Monitoring Plan Emission reductions WB Carbon Finance: project design involves three distinct elements.

How to project ERs Use the project design (baseline, calculation concept) Make reasonable assumptions about the data to be monitored Run the calculation tool (spreadsheets)

What is the Emission Reduction Study? Forecasts –emissions in baseline scenario –emissions in project scenario –expected emission reductions Establishes environmental additionality Provides structured risk information by simulating ER calculation (sensitivity analysis) Is a basis for informed negotiations

Summary of steps & PCF document system Project Design Document (PDD) Baseline Study (What is the baseline scenario?) Baseline Study (What is the baseline scenario?) Monitoring Plan (How to measure ERs?) Monitoring Plan (How to measure ERs?) Emission Reduction Study (How many ERs to expect?) Emission Reduction Study (How many ERs to expect?) Baseline method Monitoring method ER Simulation

Baseline Study

Two Baseline Filters Boundary for possible baseline scenarios –where do you look? Possible alternative scenarios to provide service –first filter: –identify constraints: legal, political, economic, costs... Plausible alternative scenarios (short list) –second filter: –chose baseline method: justify why most appropriate –apply method and determine: => the most likely baseline scenario

How to structure baseline studies? Information on: CDM modalities, country and sector, legal and other constraints and requirement, proposed project, project context etc. Possible baseline methods Baseline method selected and justified Criteria for baseline method selection Plausible baseline scenarios (shortlist) Baseline scenario determined Possible baseline scenarios Constraints and requirements Monitoring and ER calculation concept

Ten rules on baselines 1.Each project must have a baseline. 2.The baseline must be established on a project-specific basis (for now), and in a transparent and conservative manner. 3.The baseline is the scenario that describes the most likely course of action and development in time (including alternative futures if anticipated and observable). 4.Scenarios are concrete: a sequence of decisions and events, a physical configuration, not simply a trend or a projection (of emissions) or an emissions baseline. 5.The baseline scenario is selected from a number of plausible scenarios, which must include the proposed project.

6.The selection is made by applying an appropriate baseline method, which builds on one of the Marrakesh approaches. 7.The baseline method must be justified: it must be an appropriate simulation of the decision making regarding the proposed project. 8.“Environmental” additionality is the only relevant additionality criterion; it requires only to show that the difference between projected baseline and project emissions is positive. 9.Aspects of both the project and the baseline scenario should be monitored, wherever possible at reasonable costs. 10.Baseline determination and monitoring / calculation of emission reductions is done by different, yet complementary methods. Ten rules on baselines

Methodology for grid-connected power projects

Power Sector Projects System capacity Base load capacity replacement Major capacity addition Micro capacity addition Base load Dispatch margin Coal Wind Thermal Hydro Dispatch additional?

Grid connected power projects Project expands generation capacity Baseline scenario often well known: usually –the existing power grid and generation capacity –plus the power expansions path over time Often unknown: Would the project be part of system expansion? I.e. … part of the baseline scenario? Cost / kWh test: Are generation costs higher than alternative options?

Baselines for power projects Comparison of investment alternatives on the basis of cost per kWh is typically used in planning of power system expansions. Since there are only two alternative scenarios –The power system with the project –The power system without the project  a cost criterion is used to determine the baseline scenario.  Methodology: step-by-step instruction on how to use the criterion

Three least cost baseline methods for power projects 1.Run expansion planning model with project:  is project not being picked up by the model? 2.Use expansion planning model to determine long-run marginal cost (LRMC):  is project cost (per kWh) higher than LRMC? 3.Determine low/least cost project to represent expansion option:  is project cost higher than cost of comparable expansion option? => If yes: the baseline is the power system without the proposed project

Calculation concepts for power sector emissions reductions? Project-by-project dispatch margin analysis? –Ex post monitoring: Which power source is displaced at the operating margin? –Central coordination to prevent double counting of displaced marginal generation Sector averages, e.g. combined build and operating margin –Simple and inexpensive, no central coordination needed –Can grossly over- or underestimate actual ERs Ex post vs. ex ante emission factors

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

Thank you! … & Questions?