2. Baselines and Additionality Lucio Pedroni - STC World Bank Carbon Finance Business This presentation is based on materials prepared by Lasse Ringius Training Seminar for BioCarbon Fund Projects September 12-14, 2005. Washington D.C.

3. Contents I.The basic concepts underlying the CDM II.Approval process of new methodologies III.Approaches to A/R CDM baseline methodologies IV.Determination of the carbon benefits of an A/R CDM project activity V.Additionality & Additionality tool

4. Concepts underlying the CDM Reduce GHG emissions (or enhance removals by sinks) in one country to permit an equivalent quantity of GHG emissions in another country, without changing the global emission balance. The Clean Development Mechanism is a baseline- and-credit trade mechanism (not a cap-and-trade mechanism).

5. Basic requirements of emissions reductions or removals under the CDM 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) Be certified by operational entities designated by the Conference of the Parties (KP, art. 5)

6. Implications Key-word:Implication for A/R CDM: –certified  Validation, Verification and Certification by accredited operational entities, EB…) –real, measurable  Monitoring (methodology + plan) –long-term  Expiring CERs to deal with the non-permanence of C storage –additional  BAU activities not eligible; must be direct human-induced –in the absence of the  Baseline (methodology + project activityassessment)

7. CoP-7 defined baseline for CDM MA CDM (44) The baseline is the scenario that: –“reasonably represents GHG emissions that would occur in the absence of the proposed project activity”; –is derived using an approved baseline methodology. MA CDM (45) The baseline shall be established: –(b) “in a transparent and conservative manner” regarding the choices of approaches, assumptions, …” –(c) “on a project-specific basis”; –(d) in accordance with simplified procedures for small scale projects.

8. CoP-9: Mutatis mutandis for A/R CDM MA CDM (44) The baseline is the scenario that: –“reasonably represents GHG emissions that would occur in the absence of the proposed project activity”; –is derived using an approved baseline methodology. MA CDM (45) The baseline shall be established: –(b) “in a transparent and conservative manner” regarding the choices of approaches, assumptions, …” –(c) “on a project-specific basis”; –(d) in accordance with simplified procedures for small scale projects the sum of the changes in the carbon stocks in the carbon pools within the project boundary (< 8 Kt CO 2 e/yr).

9. Approved methodologies So far, no baseline or monitoring methodology has been approved for A/R CDM project activities. 13 methodologies have been proposed, 5 have not been approved, 8 are under evaluation and 3 are rated B. The term “baseline methodology” is somewhat misleading as the EB actually requires to address the following items: 1.Eligibility of the activity and of the land 2.Baseline 3.Additionality 4.Project scenario 5.Leakage 6.Net anthropogenic GHG removal by sinks

10. Eligible activities C/ha time Deforestation C/ha time Reforestation C/ha time Afforestation > 50 years In the LULUCF sector during the first commitment period (2008-2012) only afforestation and reforestation are eligible project activities.

11. C/ha time Reforestation 31.12.1989 Reforestation C/ha time 31.12.1989 Not CDM eligible CDM eligible Afforestation First commitment period Eligible activities

12. Eligible lands A/R project activities are eligible for the CDM only if they occur on lands that were without forest on 31.12.1989 (= “Kyoto land”). Each host country decides, but must use these parameters Taking this decision is a CDM participation requirement. Assessment method is part of the baseline methodology. What is a CDM forest? - Area: 0.05 – 1.0 ha - Crown cover: 10 – 30 % - Tree height: 2 – 5 m

13. Preparation of (draft) PDD and (if the B or M methodologies are new) of AR-NMB + AR-NMM Request for revision (8 weeks) DOE: Checks the methodology Approval of the methodology EB evaluates methodology Approval process of A/R NBM & NMM methodologies & PDDs EB examines the validated PDD A/R WG Experts DOE validates the full PDD Approved methodologyNew methodology No Yes No DOE can finalize the validation of the PDD EB registers the new methodology EB reviews the PDD (max. 2 meetings) Approval of the project Yes No EB registers the new project

14. Timing of the approval process of A/R NBM & NMM methodologies 4 months

15. Baseline approaches for A/R projects (Decision 19 CoP-9) (22a) “Existing or historical, as applicable, changes in carbon stocks in the carbon pools within the project boundary” (22b) “Changes in C stocks in the pools within the project boundary from a land use that represents an economically attractive course of action, taking into account barriers to investment” (22c) “Changes in carbon stocks in the pools within the project boundary from the most likely land use at the time the project starts” A baseline methodology must be developed using one of the following approaches:

16. (22a) “Existing or historical, as applicable, changes in carbon stocks in the carbon pools within the project boundary” (22b) “Changes in C stocks in the pools within the project boundary from a land use that represents an economically attractive course of action, taking into account barriers to investment”  Data are available to determine the existing or historical changes in carbon stocks.  It can be shown that the prevailing land use (BAU) is not expected to change in absence of the project (but carbon stocks can change!).  Predetermines a historical control group baseline methodology.  Data are available for economic comparison of different land-use alternatives.  It can be shown that land use decisions are mainly driven by economic factors, and that change in such factors may trigger a change in land use.  Predetermines an economic baseline methodology, such as investment analysis (IRR, least cost etc.) How to select the baseline approach?

17. (22c) “Changes in carbon stocks in the pools within the project boundary from the most likely land use at the time the project starts”  This approach is seen by many observers as similar to approach (a), but applicable where land-use change is expected to occur (in absence of the project).  Could also be interpreted as a statistical approach, whereby the likelihood of prospective land uses within the project boundary is estimated (e.g. from a sample taken from a standard control group) How to select the baseline approach?

18. The baseline scenario is the most likely land use and land cover development over time within the project boundary. It includes a conservative and transparent estimation of the sum of the changes in the carbons stocks in the carbon pools accompanying any such LULC development. The baseline scenario can include development alternatives that may be realized during the project crediting period, if such developments can reasonably be anticipated. The baseline scenario is not a total quantity of carbon conserved, or an unit expression of sequestration (such as X tC/ha/yr), in the base case. CFB definition of baseline

19. Carbon Time = Estimation of what may occur under the CDM ex ante = Estimation of what would otherwise occur Only the “additional carbon” has a potential market value. Additional carbon Project crediting period Project carbon Baseline carbon ex ante PROJECTION PROJECTION BASELINE STUDY Baseline study – ex ante

20. Carbon Time Monitoring ex ante Project crediting period ex ante = Estimation based on ex post measurements in situ Project carbon ex post = Estimation based on ex ante (“frozen”) estimation or on ex post measurements in or ex situ (monitored baseline) - depending on the methodology. Baseline carbon ex post FACT COUNTER- FACTUAL Monitoring – ex post

21. Nearby the Project AreaProject Area Leakage = Increased GHG emissions outside the project boundary attributable to the project activity (e.g. induced land use/cover change, increased consumption of fossil fuels) and measurable. Leakage 2005 2005+X CO 2 2005+X C C The method to be used to assess leakage is part of the “baseline” methodology.

22. Outside the project boundary, “attributable” and “measurable” Within the project boundary = “Actual net GHG removal by sinks” Carbon benefits of A/R CDM project activities Project scenario (changes in the carbon stocks in the carbon pools) increase in project emissions = “Baseline net GHG removal by sinks” Baseline scenario (changes in the carbon stocks in the carbon pools) = “Leakage” (decrease in the carbon stocks in the carbon pools) increase in emissions emissions not considered! = “Net anthropogenic GHG removal by sinks” “Not permanent” ! “Permanent” !

23. Additionality Two basic options for judging additionality: 1.Qualitative: A project activity is “additional” or “not additional”. Accordingly it gets 100% or 0% of the carbon credits. 2. Quantitative: Additionality is assessed probabilistically and carbon credits are awarded accordingly. Under the Kyoto Protocol “additionality” is a “yes” or “no” judgment.

24. EB10: “Additionality Tools” Examples of tools that may be used to demonstrate that a project activity is additional and therefore not the baseline scenario include, among others: (a) A flow-chart or series of questions that lead to a narrowing of potential baseline options. (b) A qualitative or quantitative assessment of different potential options and an indication of why the non-project option is more likely. (c) A qualitative or quantitative assessment of one or more barriers facing the proposed project activity (such as those laid out for small-scale CDM projects). (d) An 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 a Party’s legislation / regulations.

25. PASS OR Step 0. Preliminary screening based on the starting date of the project activity Step 1. Identification of alternatives to the project activity consistent with current laws and regulations PASS Step 2. Investment Analysis Step 3. Barrier analysis CDM Additionality Tool (EB 16, Annex 1) PASS PROJECT ACTIVITY IS ADDITIONAL PASS Step 5. Impact of CDM registration PASS Step 4. Common practice

26. PASS OR Step 0. Preliminary screening based on the starting date of the project activity Step 1. Identification of alternatives to the project activity consistent with current laws and regulations PASS Step 2. Investment Analysis Step 3. Barrier analysis PASS PROJECT ACTIVITY IS ADDITIONAL PASS Step 5. Impact of CDM registration PASS Step 4. Common practice A/R CDM Additionality Tool (AR WG 4, Annex 1 - Draft)

27. PASS OR Step 0. Preliminary screening based on the starting date of the project activity Step 1. Identification of alternatives to the project activity consistent with current laws and regulations PASS Step 2. Investment Analysis Step 3. Barrier analysis A/R CDM Additionality Tool (AR WG 4, Annex 1 - Draft) PASS PROJECT ACTIVITY IS ADDITIONAL Step 4. Impact of CDM registration PASS

28. Purpose and Role of the Additionality Tool The purpose of the additionality tool is to check the claim of additionality and ensure that baseline activities do not receive CERs. The additionality tool is guidance that can be used for new methodologies: Project developers must either include the additionality tool in the new methodology, adapt it to the specific case, or propose alternative tools. Additionality tool and approved methodologies: In the future, the A/R additionality tool may have to be used in conjunction with consolidated methodologies (as in the case of ACM0001 – waste, ACM0002 – renewables). Approved methodologies will not be affected by changes of the additionality tool.

29. A/R CDM Additionality Tool (AR WG 4, Annex 1 - Draft) PASS Step 0. Preliminary screening based on the starting date of the project activity Step 1. Identification of alternatives to the project activity consistent with current laws and regulations Step 2. Investment Analysis Step 3. Barrier analysis Step 4. Impact of CDM registration PROJECT ACTIVITY IS ADDITIONAL PASS OR PASS

30. Step 0 – Starting date This step is relevant only for project participants whishing to have a crediting period starting prior to the registration of their project activity. Basic requirements: A/R project activity started between 1 January 2000 and the date of its registration under the CDM. PDD submitted for registration before 31 December 2005. Evidence exists that the incentive from the CDM was seriously considered in the decision to proceed with the project activity.

31. Step 0a – Specific A/R features This second part of step 0 deals with specific features of A/R CDM project activities (and does not appear to be strictly related to additionality). Basic requirements: Evidence that the land within the project boundary is eligible for A/R CDM project activities. Evidence that the proposed activity is direct human-induced (not a mere continuation of the pre-project spontaneous processes).

32. A/R CDM Additionality Tool (AR WG 4, Annex 1 - Draft) PASS Step 0. Preliminary screening based on the starting date of the project activity Step 1. Identification of alternatives to the project activity consistent with current laws and regulations Step 2. Investment Analysis Step 3. Barrier analysis Step 4. Impact of CDM registration PROJECT ACTIVITY IS ADDITIONAL PASS OR PASS

33. Step 1: Identification of Alternatives (1.a) Define all realistic and credible alternatives to the project activity(s) that can be (part of) the baseline scenario which are available to project participants or similar project developers: –include the proposed project not undertaken as a CDM project, –other plausible and credible land-use alternatives to the project activity deemed appropriate with respect to location, size, funds/expertise requirements, etc., –include continuation of the current situation (if applicable).  If the proposed project is the only alternative that is in compliance with all regulations with which there is general compliance, then it is not additional. (1.b) All alternatives considered should comply with applicable legal and regulatory requirements that are systematically enforced.

34. A/R CDM Additionality Tool (AR WG 4, Annex 1 - Draft) PASS Step 0. Preliminary screening based on the starting date of the project activity Step 1. Identification of alternatives to the project activity consistent with current laws and regulations Step 2. Investment Analysis Step 3. Barrier analysis Step 4. Impact of CDM registration PROJECT ACTIVITY IS ADDITIONAL PASS OR PASS

35. Step 2 – Investment Analysis Purpose: Determine whether the project activity is economically or financially less attractive than other alternatives, ignoring carbon revenue.  If the project activity is unlikely to be (the most) financially attractive, proceed to step 4 (or perform barrier analysis).

36. Investment Analysis - options Sub-step 2.a: Determine appropriate analysis method Sub-step 2.b: Apply the appropriate analysis method Option I – Simple cost analysis: Use if project generates no financial benefits other than CDM related income. Option II – Investment comparison analysis: Use financial indicator, such as IRR, NPV, cost benefit ratio, or other including all costs, revenues and incentives/subsidies, and compare with all alternatives. Option III – Benchmark analysis: Use financial indicator and compare with benchmark indicator representing standard returns in the market.

37. Step 2 – Investment Analysis Sub-step 2.c: Calculation and comparison of financial indicators (only options II and III): - of the project alternative and other alternatives (Option II) - of the project alternative only (Option III) - Include capital costs, operation and maintenance costs, and revenues (excluding CER revenues, but including subsidies/fiscal incentives where applicable). Sub-step 2.d: Perform financial sensitivity analysis (only option II and III)  If the project is unlikely to be (the most) financially attractive, proceed to step 4, or perform barrier analysis.

38. A/R CDM Additionality Tool (AR WG 4, Annex 1 - Draft) PASS Step 0. Preliminary screening based on the starting date of the project activity Step 1. Identification of alternatives to the project activity consistent with current laws and regulations Step 2. Investment Analysis Step 3. Barrier analysis Step 4. Impact of CDM registration PROJECT ACTIVITY IS ADDITIONAL PASS OR PASS

39. Purpose: Determine whether the project activity faces barriers that prevent its implementation, but not the implementation of at least one of the other alternatives identified in step 1.  If 3a and 3b are not satisfied, the project activity is not additional. Step 3 – Barrier Analysis Sub-steps: 3a: Identify barriers that would prevent the implementation of the proposed A/R project activity and provide evidence of their existence. 3b: Show that barriers would not prevent the implementation of at least one of the alternatives.

40. Step 3 – Types of Barriers Investment barriers: -Debt funding not available for this type of project activity; -No access to international capital markets due to real or perceived risks associated with domestic or foreign direct investment; -Lack of access to credit. Institutional barriers: -Risk related to changes in government policies and laws; -Lack of enforcement of forest or land-use-related legislation. Technological barriers: -Lack of access to planting materials -Lack of infrastructure for implementation of the technology.

41. Step 3 – Types of Barriers Barriers related to local tradition: -Traditional knowledge or lack thereof, laws and customs, market conditions, practices; -Traditional equipment and technology; Barriers due to prevailing practices: -The is the “first of its kind” in the region or country; Barriers due to local ecological conditions: -Degraded soil -Catastrophic natural and/or human-induced events -Unfavorable meteorological conditions -Pervasive opportunistic species preventing regeneration of trees -Unfavorable course of ecological succession -Biotic pressure in terms of grazing, fodder collection, etc.

42. Step 3 – Types of Barriers Barriers due to social conditions: -Demographic pressure on the land -Social conflict among interest groups in the region where the project takes place; -Widespread illegal practices -Lack of skilled and/or properly trained labour force -Lack of organization of local communities. Note: These barriers are inter alia; the project proponent can identify different types of barriers.

43. A/R CDM Additionality Tool (AR WG 4, Annex 1 - Draft) PASS Step 0. Preliminary screening based on the starting date of the project activity Step 1. Identification of alternatives to the project activity consistent with current laws and regulations Step 2. Investment Analysis Step 3. Barrier analysis Step 4. Impact of CDM registration PROJECT ACTIVITY IS ADDITIONAL PASS OR PASS

44. Purpose: Explain how the CDM registration, and the attendant benefits and incentives derived from this registration, will alleviate the financial or economic hurdles or the identified barriers and thus enable the project to be undertaken. Benefits and incentives: Net anthropogenic GHG removal by sinks; Financial benefit of the revenue obtained from t/lCER sales; Attracting new players who are not exposed to the same barriers, or can accept a lower IRR; Attracting new players who bring the capacity to implement a new technology/practice; Reducing inflation/exchange rate risk affecting expected revenues and attractiveness for investors.  If step 4 is not satisfied, the project is not additional. Step 4 – Impact of CDM Registration

45. A/R CDM Additionality Tool (AR WG 4, Annex 1 - Draft) PASS Step 0. Preliminary screening based on the starting date of the project activity Step 1. Identification of alternatives to the project activity consistent with current laws and regulations Step 2. Investment Analysis Step 3. Barrier analysis Step 4. Impact of CDM registration PROJECT ACTIVITY IS ADDITIONAL PASS OR PASS

46. Thank you! Thank you!