CDM BASELINE METHODOLOGIES: The devil is in the details Climate Change Information Center Manila Observatory Ateneo de Manila University

Contents I.Importance of baselines in CDM II.Relevant studies needed in a CDM PDD III.Baseline methodologies A.Procedures to determine project additionality B.Procedures for calculating baseline emissions C.Simplified methodologies for small-scale projects IV.Concluding remarks

I. The Importance of Baselines in CDM

CDM Project Achieves Sustainable Development objectives for the host developing country Reduces GHG Emissions

Clean Development Mechanism Enables developed countries (known as Annex I countries) to meet their emission reduction commitments in a flexible and cost- effective manner Assists developing countries (non-Annex I countries) in meeting their sustainable development objectives Investors benefit by obtaining Certificates of Emissions Reductions (CERs) Host countries benefit in the form of investment, access to better technology, and local sustainable development

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. (KP Art. 12.5b) –Be additional to any that would occur in the absence of the certified project activity. (KP Art. 12.5c) => Integrity and credibility is critical

Basic notion of baselines CO2 Emissions CDM project CO2 emissions (observable) Real, measurable and long-term Additional CO2 emissions reduction Years Baseline scenario CO2 emissions (that would occur) baseline study

CER: A special product CER is a payment for the Project Developer not to produce To reduce GHG emissions Thus, the importance of special requirements –Definition of baselines –Calculation of GHG emission reductions –Monitoring of GHG emission reductions

What is a baseline scenario? The baseline is the scenario that unfolds in the absence of the project activity In other words, it is an interpretation of “what would have happened otherwise” Presumed counterfactual alternative to the proposed CDM project

Additionality Additionality is the key eligibility criterion in CDM projects  You must do something that you would not have done without the CDM Two types of additionality  Project Additionality  Environmental Additionality

Baseline methodologies Evaluate Project Additionality –Methodology (Meth) Panel Recommendation to Executive Board (EB), July 2003 Environmental Additionality –Marrakech Accords CDM Modalities and Procedures (M&P), COP-7, 2001

Project Additionality Baseline methodology evaluates whether or not the proposed CDM project activity would have gone ahead anyway. Baseline methodology assesses why the proposed CDM project activity is less likely to occur than one or more of the other possible scenarios.

Project Additionality A baseline methodology evaluates a priori whether the CDM project activity is the baseline scenario. CDM project should be considered as a possible baseline scenario since the possibility it would have been implemented in the absence of carbon credits (CERs) must be examined to determine whether it is additional Baseline methodology must demonstrate that the CDM project activity is additional and therefore not the baseline scenario.

Environmental Additionality A CDM project activity is additional if anthropogenic emissions of GHGs by sources are reduced below those that would have occurred in the absence of the registered CDM project activity. -CDM M&P para. 43 Emission Reductions = hypothetical baseline emissions – effective (project) emissions

Environmental Additionality Forecast: Baseline Emissions – Project Emissions ___________________ = Emission Reductions (must be >0) Environmental additionality: if project is expected to generate a positive quantity of ERs.

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

Baseline methodologies Evaluate Project Additionality –Methodology (Meth) Panel Recommendation to Executive Board (EB), July 2003 Environmental Additionality –Marrakech Accords CDM Modalities and Procedures (M&P), COP-7, 2001

II. Relevant Studies Needed in a CDM PDD

What are the relevant questions? Project Design Document (PDD) with Annexes: –What is the baseline scenario?  Baseline Study –How to measure the ER?  Monitoring Plan –How many ER to expect?  Emissions Reduction Study

Baseline Study Baseline Study (BLS)

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

Purpose of the BLS The systematic determination and description of the baseline scenario, Using an agreed baseline methodology.  A variety of approaches and methods are possible. The baseline scenario is: the basis for the Monitoring Plan and thus for the determination of baseline emissions.

Sections of the BLS Project description and characteristics Sector background etc. Boundaries Selection of baseline method Possible alternative scenarios (to include BAU & project) Legal and other constraints Selection of plausible alternative scenarios Application of selected baseline method and determination of the most likely baseline scenario Discussion of time dimension of baseline Leakage (and Permanence for sink projects) Greenhouse gases covered => Complete description of determined baseline scenario and its development over time

Monitoring Plan Monitoring Plan (MP)

Purpose of the Monitoring Plan Provides a complete calculation system for ERs Builds on and complements the BLS Is a legally binding document, a part of the ER Purchase Agreement Develops the monitoring and ER calculation concept Allows to monitor: –baseline emissions and –project emissions –using emission indicators and time indicators Thus, meets the KP / MA requirements for ex post monitoring of project and baseline data –monitoring is preferred option; projections are a fallback option Is a set of clear and definite instructions

Emission Reduction Study Emission Reduction Study (ERS)

Purpose of the ERS To project –emissions in baseline scenario –emissions in project scenario –expected emission reductions To establish environmental additionality To provide structured risk information by simulating ER calculation (sensitivity analysis) To provide basis for informed negotiations

Emission Reduction Study Builds on Monitoring Plan Uses MP concepts, assumptions, parameters etc Ensures that same methodology is used ex ante and ex post Makes assumptions about monitorable indicators (forecast likely indicator values) Uses MP calculation tool (spreadsheet) to calculate baseline emissions, project emissions and ERs. Runs simulations with different data sets for monitorable indicators and possible development scenarios Projects and records expected baseline and project emissions and ERs for each crediting year

III. Baseline methodologies

How to develop CDM baselines? (CDM M&P) (45) A baseline shall be established … a)using approved and new methodologies, b)in a transparent and conservative manner, c)on a project-specific basis, d)using simplified procedures for small-scale projects, e)taking account of national and/or sectoral policies. (e.g., sectoral reform initiatives, local fuel availability, power sector expansion plans, and the economic situation in the project sector)

How to develop CDM baselines? (CDM M&P) (48)Select baseline method … –that is deemed most appropriate, –that is consistent with guidance from Executive Board, –… and justify the choice.

Project Additionality III.A Procedures to determine Project Additionality

Meth Panel Recommendations to EB, July 2003 Baseline methodology must include a procedure to assess “why the proposed project CDM project activity” is less likely to occur than one or more of the other possible scenarios.

Meth Panel Recommendations to EB, July 2003 Examples of such procedures Qualitative or quantitative assessment of different potential options and an indication of why the non-project option is more likely to occur Qualitative or quantitative assessment of one or more barriers facing the proposed project activity. 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 recent/pending legislation/regulations.

Some methods to determine project additionality Economic / investment analysis –Internal rate of return comparison –Least cost comparison (power projects) Scenario / barrier analysis –Comparison based on investment risks Control groups

Investment Analysis An established and rigorous methodology An objective method that screens alternatives on the basis of the maximization of the return of investment The baseline would have the highest IRR or NPV or lowest cost, not taking into account any CER-revenues

baseline CDM project

Economic Analysis of Alternatives Net Present Value Options 0 CERs CDM ProjectsBaseline

Economic Analysis of Alternatives Options CDM Project Baseline: Lowest Cost COSTCOST

Scenario Analysis Investigates the barriers and risks concerning an investment decision Types of risks: regulatory, market, development, environmental, project & country risks Non-economic constraints are the predominant factors for an investment decision Baseline would be the option with the lowest barriers and risks

Scenario Analysis A thorough analysis of the local circumstances need to be made to justify the baseline selection Challenge of this method is to provide data and other information that can be validated

Control group method Method searches a comparison group that is not offered the opportunity to sell CERs and use their behavior as reference Finding an appropriate control group is not an easy task, since each group will often face different circumstances. Baseline is the control group, CDM project is the treatment group

Control group method Difficulty of finding valid control groups can be overcome if the sample of the control groups is bigger Difficulty of finding groups which are reasonably homogenous

calculating baseline emissions III.B Procedures for calculating baseline emissions

Challenge of calculating baseline emissions Baseline is a counterfactual –What would have happened otherwise if there was no CDM project? How to forecast the emissions which would have occurred? How to forecast the emissions which would have happened otherwise if there was no CDM project?

CDM M&P Para. 44 The baseline of a CDM project activity is the scenario that reasonably represents the anthropogenic emissions by sources of greenhouse gases that would occur in the absence of the proposed project activity

CDM M&P Approaches (Para. 48) a)Existing actual or historical emissions b)Emissions from a technology that represents an economically attractive course of action, taking into account barriers to investment c)The average emissions of similar activities, in previous 5 years, in similar social, economic, environmental circumstances, and whose performance is the top 20% of their category

Meth Panel Recommendation, no. 15, July 2003 Since only one approach should be chosen in accordance with paragraph 48 of the CDM M&P, developers are advised to select the one that most closely reflects the process used for calculating baseline emissions or baseline emission rates.

Meth Panel Recommendation no. 15 & 16, July 2003 Process used for project additionality determination can be different from the approach used for calculating baseline emissions Paragraph 48 of CDM M&P apply to the approach used for calculating baseline emissions

Clean Development Mechanism Types of small-scale projects that could qualify for fast-track approval procedures Renewable energy projects up to 15 megawatts (MW) of output capacity Energy efficiency improvements that reduce energy consumption on the supply and/or demand side by up to 15 gigawatt-hours (GWh)/year Other project activities that both reduce emissions at source and directly emit less than 15 kilotons (kt) of CO 2 equivalent annually

Small-Scale III.C Small-Scale CDM Projects Simplified Simplified Baseline and Monitoring Methodologies

Type I – Renewable Energy Projects I.A Electricity Generation by the User –E.g., solar home systems, solar water pumps, wind battery chargers I.B Mechanical Energy for the User –E.g., wind-powered pumps, solar water pumps, water mills, wind mills I.C Thermal Energy for the User –E.g., solar water heaters and dryers, solar cookers, energy derived from biomass for water heating I.D Renewable Electricity Generation for a Grid

Type I – Energy Efficiency Improvement Projects II.A Supply-side Energy Efficiency Improvements – Transmission and Distribution II.B Supply-side Energy Efficiency Improvements – Generation II.C Demand-Side Energy Efficiency Program for Specific Technologies II.D Energy Efficiency and Fuel Switching Measures for Industrial Facilities II.E Energy Efficiency and Fuel Switching Measures for Buildings

Type III – Other Project Activities III.A Agriculture III.B Switching Fossil Fuels III.C Emission reductions by low- greenhouse emission vehicles III.D Methane recovery and avoidance

Simplified methodologies for Small-Scale CDM Projects Technology / Measure Boundary Baseline Leakage Monitoring

IV. Concluding remarks

Interpretation of COP-7 Guidance … is not concrete enough: –Mixture of baseline and monitoring concepts –Concrete baseline and monitoring methods yet to be agreed / approved –When to apply which approach and method? … needs to be interpreted by project developer, Designated Operational Entities, Meth Panel and the Executive Board in light and context of other relevant provisions Depends on concrete project input from project developers and Parties The development of a project baseline and monitoring concept is a highly creative process which must yield conceptually rigorous results. It is currently more an art than a science.

What is emerging from PCF, CERUPT … … is a variety of methods: –No single, but a hybrid mixture of methods. –Complexity depends on circumstances, project type and design. –Methodologies to be approved, “political issues” to be decided by the Parities. Baseline study and MP must “work” together: –Method-driven scenario forecast in the baseline study – as a basis for: –… monitoring concept and tools for calculating baseline and project emissions in the MP. More experience and discussion is needed –Contribution to evolutionary concept for baselines and monitoring. The devil is in the details

Roberto C. Yap, S.J., Ph.D. Environmental Economist Climate Change Information Center Manila Observatory Ateneo de Manila University Tel Fax