Practical Experience with Small-scale Projects: Issues and Suggestions Johannes Heister, Lasse Ringius Carbon Finance Unit, World Bank Bonn, 9-10 March 2006 UNFCCC Technical Workshop on Joint Implementation

SSC Projects: Historical Background In the late 1990, global political consensus that small CDM projects are desirable. Key reasons: sustainability benefits environmentally benign and often inherently attractive by themselves the predominant option in rural areas and poor countries. Unlike regular-size CDM projects, small projects unable to absorb high transaction costs. Simplified rules needed. In 2001 agreement in Marrakesh reached to develop simplified modalities and procedures for SSC projects.

Three types of SSC Projects Three types of SSC Projects

Three Main Project Types

Envisioned Advantages of Simplification Lower development and transaction costs. Shortened project development time. Early delivery. Less regulatory uncertainty. Reduced risks. Simplified environmental impact assessment. Simplified baselines and additionality tests.

Experience with SSC projects to date Fewer SSC projects than expected -- and almost no energy savings projects (i.e. project category 2) -- have been developed. SSC projects have not lead to a more balanced regional distribution of projects. The simplified modalities and procedures have not resulted in significantly lower transaction costs, or a fast-track process, for small projects. Main reasons include: …

Reasons for difficulties with SSC … no significantly lower transaction costs and fast-track process. Main reasons include: The host country context for ssc project can be very complex (small enterprises, households, NGOs with very limited capacity and resources). Availability of required data is often limited at the project level. The concept of additionality is often difficult to grasp for project developers. Additionality: The barrier test is subjective and often contrary to project developers intuition. Little scope for aggregation (bundling) of projects consisting of a high number of small geographically and temporally dispersed components. Mismatch between real-world project conditions and methodologies is common and have resulted in a need for frequent revisions and clarifications of methodologies, and the development of new methodologies.

General observations There are important similarities between SSC projects under CDM and JI, but also differences, most importantly that they occur under the general emission cap of JI countries. There are significant SSC type mitigation opportunities in JI countries, which are unlikely to be accessible by JI without specific modalities. Small projects typically have a limited impact on emissions, are often community-based and can demonstrate climate-friendly activities to a large number of participants, thus setting examples, and contribute to the sustainable development of the host country. Small JI projects will not be able to absorb the high transaction costs experienced under CDM, in terms of money and time invested in project development, cost of monitoring and verification. Poor regions will only be able to significantly participate in JI through SSC projects. Thus, establishing SSC projects under JI as a separate project group with simplified modalities will be helpful, meaningful and justified.

Threshold and eligibility criteria The thresholds established under CDM should be reconsidered for JI projects: 15 MW nominal capacity for renewables projects seems workable. The threshold for energy savings projects under JI should be much higher, e.g. 150 GWh/yr (the 15GWh for CDM SSC are roughly equivalent with 1-3 MW generation capacity.) The threshold for “other projects” should be defined differently than under CDM (the link between project emissions and project size is questionable). It is not necessary the size of a project, that is relevant. There should be no limit to bundling of SSC projects, provided they meet the eligibility criteria for SSC JI projects.

Typical project types in JI countries Some types of small projects appear to be more important in JI countries, in particular energy efficiency on the supply and demand side. Programs to promote energy efficiency exist in many JI countries and often include relatively small activities. The definition of, and modalities for, SSC projects should be supportive of such programs.

Key lessons from the SSC projects experience to date Minor simplification benefits will not spur the development of SSC JI projects. The uncertainties are still great and the burden on project developers is too heavy. Lead-time advantages, economies-of-scale and simpler baseline scenarios and additionality tests favor large projects involving non- CO2 gases over SSC projects. Therefore: Simplification benefits need to be significant compared to large- scale projects. Simple but flexible rules are needed. The additionality test should be limited to a common practice test. Baselines should be predefined on the basis of business as usual scenarios and average emissions.

Further Suggestions The modalities for SSC JI should facilitate bundling of projects in particular regarding Project preparation / documentation (paper work reduction), Monitoring and verification (sampling across SSC projects), and Flexibility regarding start dates of SSC activities in a bundle. Host country policies and programs and programmatic activities implemented through non-government intermediaries should be supported by SSC JI modalities. In this context, methodologies should be developed that do not require attribution of emission reductions to specific SSC activities. An additionality test for SSC JI projects may be limited to a demonstration of emission reductions, provided that baselines are predefined at an appropriate level. Alternatively, additionality could be pre-determined on a project-type basis, e.g. for certain renewable energy projects. There is probably no need to consider leakage from SSC JI projects. Finally, project developer should be able to rely on established modalities and methodologies for SSC JI projects throughout 2012 to support capacity development in project intermediaries.