Creating the Carbon Asset: PCF Workshop on JI & CDM Methodologies COP-8, New Delhi, 22 October 2002 – Johannes Heister, PCF

A decade of work on methodology UNFCCC (1992): idea of “joint implementation” COP-2 (1995): Activities Implemented Jointly (AIJ) –Pilot Phase –Concept of additionality –Research on methodology –=> “baselines are complex” Kyoto Protocol (1997): JI & CDM –“Transfer” of additional emission reductions (ERs) –First project experience –=> “baselines can work”, … as part of a broader concept for monitoring and calculation of additional ERs. Marrakech Accords (2001): Modalities & Procedures –Agreement on rules and institutions –=> Process-oriented and evolutionary approach

How far have we got? Significant and real project experience –PCF and other project developers Serious conceptual work on methodology and baselines –Research institutions Projects validated –Certification firms Projects soon to be approved –CDM Executive Board => Learning by doing has worked! –But what have we learned so far?

Workshop agenda Introduction: –Approval of methodologies in the CDM framework –PCF approaches to JI and CDM methodologies Case studies and research: –Electric power projects that feed to the grid –Scenario analysis and control groups –Simplification, standardization and small-scale projects Which format for EB approved methodologies?

Session 1: Introduction to PCF methodology for JI and CDM COP-8, New Delhi, 22 October 2002 – Johannes Heister, PCF

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) => Integrity and credibility: is critical to support a nascent market

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

What are baseline scenarios? The baseline is the scenario that unfolds in the absence of the project activity”, it is not simply business-as-usual: –What is an economically attractive course of action? –What is the regulatory and policy framework? –What is the time profile of different technologies? Baseline scenarios depend on identified supply and on production circumstances, not simply on project type: –How can a particular product or service be delivered? –Calculation of ERs assumes comparison based output/service level (e.g. electric power) in the baseline scenario (principle of service equivalence). =>The relevant baseline scenario is the most likely course of action and development over time.

How to measure ERs? CO2 Emissions project emissions (actual) Additional ERs Years baseline emissions (hypothetical, partly monitorable) monitoring plan 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. A good monitoring concept ensures credibility and verifiability of the maximum number of ERs. The monitoring concept can deal with issues that the baseline study cannot address.

How to determine additionality? Environmental additionality is the relevant JI and CDM eligibility criterion. Forecast: Baseline Emissions – Project Emissions ___________________ = Emission Reductions (must be > 0) The project is additional if it is expected to generate a positive quantity of ERs.

How does the PCF system for baseline establishment work? At PIN stage –Baseline discussions with PCF team –Guidance, recommendation of approach Preparation of PCN –Discussions with project proponent –Possibly reconnaissance missions –Draft baseline and monitoring concept Preparation of Project Documents Validation

What are the relevant questions? Project Design Document (PDD) with Annexes: –What is the baseline scenario?  BLS –How to measure the ER?  MP –How many ER to expect?  ERS 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.

How does the PCF document system work?

Information on  project  project context  Kyoto Protocol  etc. Baseline Study (BLS) Monitoring Plan (MP) Emission Reduction Study (ERS) Project Design Document (PDD) Project Activity Summary with Annexes: Project Design Document (PDD) Project Activity Summary with Annexes:

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

Purpose of the BLS The systematic determination and description of the baseline scenario,  The baseline is the scenario that “reasonably represents GHG emissions that would occur in the absence of the proposed project activity”. (COP-7) 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 sequestration projects) Greenhouse gases covered => Complete description of determined baseline scenario and its development over time

Monitoring Plan

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

The Monitoring Plan is key Information on  project  project context  Kyoto Protocol  etc. Description of Baseline Scenario and its development in time Monitoring Plan -monitoring concept, indicators, proxies, conservative parameters, instructions for baseline and project emissions (ex post) -complete calculation system for ERs (spreadsheets) -sustainable development indicators -operational and quality control system -verification provisions Emission Reduction Study

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

Use the MP to project ERs Information on  project  project context  Kyoto Protocol  etc. Monitoring Plan: concept, assumptions, spreadsheets Projection of ERs: - assumptions for indicators - simulation using MP system - sensitivity analysis  Baseline & project emissions  Expected additional ERs (additionality requirement)

What does “Marrakech” say about modalities for the CDM? (very similar for JI)

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”, –“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)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. (48) Select baseline method … –that is deemed most appropriate, –that is consistent with guidance from Executive Board, –… and justify the choice.

COP-7 on CDM baseline approaches (48a) “existing actual or historical emissions”  defines BAU as baseline scenario and  a historic control group as monitoring concept (48b) “economically attractive course of action” and “taking into account barriers to investment”  defines an economic baseline method, such as investment analysis (IRR, least cost etc.) (48c) “average emissions of similar activities, in previous 5 years, similar circumstance, top 20% performance”  defines build margin as baseline scenario and  a standard control group as monitoring concept

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.

COP-7 on Monitoring The monitoring plan must provide for the collection of all data necessary for (a)estimating or measuring project emissions (b)determining the baseline of emissions The monitoring plan must describe the formulae used to (a)calculate and to estimate project emissions (b)calculate and to project baseline emissions

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 and the Executive Board in light and context of other relevant provisions Depends on concrete project input from project developers and Parties

How does the PCF determine project baselines?

Types of Baseline Methods Project-based methods Standard-oriented methods Simplified methods for small-scale projects

“Regular” project-based methods Economic / investment analysis –Internal rate of return comparison  Latvia –Least cost comparison (power projects)  Chile, Morocco Scenario / barrier analysis –Comparison based on investment risks  Uganda Control groups  Brazil/Plantar

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 (incl. no investment) with the highest IRR or the highest NPV or the lowest costs (all risk adjusted), –not considering GHG emissions or the value of ERs. Investment analysis is a rigorous approach...

… 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 start times for alternative investments. Determine investment constraints and parameters (regulatory policy, costs, risks, etc. – but don’t include value of ERs). Calculate comparator (IRR / NPV / unit costs) and select highest / lowest ranking alternative as baseline.

baseline PCF project

Examples for project-based methods

Session 2: Methodology for grid-connected power projects COP-8, New Delhi, 22 October 2002 – Johannes Heister, PCF

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?

What do we know about the baseline scenario? Project is an addition to the national grid and expands generation capacity The baseline scenario is usually: –the existing power grid and generation capacity –plus the power expansions path over time Does an expansion plan exist? Would/should the project be part of planned expansion if it had been considered? => Only necessary to show additionality.

Least cost baseline method for power projects Comparison of investment alternatives on the basis of cost per kWh is typically used in planning of power system expansions. Since the baseline scenario is known, an additionality test for the planned project may be sufficient. –Is the project not part of planned system expansion? –Is the project’s per unit cost higher than the system’s long-run marginal generation cost? => If yes: project is additional

Options for determination of power sector emissions reductions? Project-by-project dispatch margin analysis? –Ex post monitoring: Which power source is displaced at the operating margin? –Fair and accurate, possibly expensive –Central coordination to prevent double counting of displaced marginal generation Sector average emissions –Can grossly over- or underestimate actual ERs –Possibly unfair, e.g. if significant hydro base load –Simple and inexpensive, no central coordination needed

Power sector baseline & monitoring Sector-wide analysis supports independent power projects (small 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 MP: Calculates emissions factor (EF): 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-MP: kWh supplied by SP x EF  ERs from SP.

Chile Chacabuquito India Tamil Nadu Kenyan Geothermal Case Studies

Session 3: Scenario analysis, barriers to investment and control groups COP-8, New Delhi, 22 October 2002 – Johannes Heister, PCF

Scenario analysis 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.

How do control groups work? Two types of control groups: –Different group of consumers or facilities not involved in and/or affected by the proposed project. –Same group of consumers or facilities before implementation of the proposed project (historic baseline). The control group must be situation-specific. –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). –Often included in the MP for certain project aspects Valid control groups are difficult to find

How to use control groups? MP 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 level of baseline emissions does the control group indicate? –When does the baseline shift?

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

Case Studies Uganda West Nile Electrification Gemina rice husk project

Session 4: Simplification, standardization and small-scale projects COP-8, New Delhi, 22 October 2002 – Johannes Heister, PCF

How do standard-oriented baselines work? Objective: –simplify baseline determination –reduce costs and risks for investor –control “gaming” Tool: –pre-approved baselines or standard values for defined project categories –in particular for small-scale projects and JI “Philosophy”: –additionality of ER “on average”, “default values” –political decision (equity, development priorities) –research and pilot application in concrete projects

Some issues with standard-oriented baselines Is political agreement feasible? –How much additionality risk is the EB / COP willing to accept? Conservative ERs? –Trade-off between costs and ER quantity –Adverse selection problem, if standards are voluntary –Low default values for large projects

Standard-oriented methods –Sector baselines –Emission factors –Benchmarks –Technology matrix –Default baselines –…

For instance, “benchmarks”: Prepared for fairly homogeneous category of projects / technology / circumstances, a sector, power grid etc. Often based on activity level and efficiency. –For instance: baseline benchmark in kg coal/kWh. Methods: average or conservative or low default value. –historic: average energy efficiency in power sector (last 5 years). –present: efficiency of latest addition to grid. –projection: expected technology. –Country/sector-specific: local circumstances, energy policies etc. Needs proof that –benchmark is applicable, because project falls in defined project category.

What about small-scale procedures? COP-8 will decide on streamlined procedures for small- scale projects, defined as: –Renewable energy projects of up to 15 MW output capacity –Energy efficiency improvement of up to 15 GWh yearly –Other activities that reduce emissions and directly emit less than 15 kt of CO 2 Small-scale projects are expected to contribute particularly to the sustainable development of rural areas CDM executive board may accept more additionality risk for small-scale projects.

Simplified methods for small-scale projects EB installed small-scale projects panel. Simplified baselines for project types proposed: a mixture of –baseline scenario assumption –ER calculation methods, and –monitoring provisions

Standard and small-scale methods

Case Studies Standardized baselines for DSM and District Heating in the Czech Republic El Salvador - conceptualization and use of power sector standard baselines

What emerges … … 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.

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