1. CDM BASELINE METHODOLOGIES: The devil is in the details DENR Training Course November 4-6, 2003 Climate Change Information Center Manila Observatory Ateneo de Manila University

2. 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

3. I. The Importance of Baselines in CDM

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

5. 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

6. 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

7. Basic notion of baselines CO 2 Emissions CDM project CO 2 emissions (observable) Real, measurable and long-term Additional CO 2 emissions reduction Years Baseline scenario CO 2 emissions (that would occur) baseline study

8. 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

9. 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

10. 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

11. 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

12. Project Additionality Without the ability to register under the CDM, the proposed project would be, or would have been, unlikely to occur

13. 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.

14. 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.

15. Environmental Additionality If the proposed CDM project activity is not implemented, a less greenhouse gas friendly activity would have been initiated or continued instead.

16. 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

17. 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.

18. How to measure ERs? CO 2 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

19. 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

20. II. Relevant Studies Needed in a CDM PDD

21. 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

22. Project Design Document Information on  project  project context  Kyoto Protocol  CDM M&P  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:

23. III. Baseline methodologies

24. 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)

25. 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.

26. Project Additionality III.A Procedures to determine Project Additionality

27. 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.

28. 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.

29. 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

30. 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

31. baseline CDM project

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

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

34. 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

35. Scenario Analysis Financial / budgetary barriers  Access to capital for project finance  Hurdle rates of third-party investors  Mismatch between investment costs and energy savings  High initial costs and lacking access to credit  Lack of access to foreign capital

36. Scenario Analysis Legal barriers  Regulatory biases or lack of regulation  Unclear ownership rights Technological barriers  Higher perceived risks of new technology  Capacity to absorb new technologies  Lack of trained personnel or technical or managerial expertise  Need to make changes to existing infra to integrate technology

37. Scenario Analysis Supply-chain barriers  Lack of adequate supply infra for spare parts, fuels, etc  Lack of transport infra Market price distortions Informational barriers  Lack of awareness about available technologies, products, financial support

38. Scenario Analysis Barriers due to prevailing practice –Prevailing practice or existing regulatory or policy requirements would have led to implementation of a technology with higher emissions

39. 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

40. Scenario Analysis Important to distinguish between: Plans and Policies –E.g., Philippine Energy Plan –Project may still be additional even if it meets one of the targets of the plans Legal Obligations –Project will most likely be not additional if it is carried out to meet legal obligations Enforceability of Legal Obligations –Project may be additional if enforcement is non- existent

41. 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

42. 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

43. Combination of Methods Lower IRR? Higher Costs? Barriers? Not Common Practice? No Yes No Not Additional Additional Yes

44. calculating baseline emissions III.B Procedures for calculating baseline emissions

45. 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?

46. 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

47. 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

48. 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.

49. 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

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

51. 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 CO2 equivalent annually

52. 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

53. 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

54. 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

55. Simplified methodologies for Small-Scale CDM Projects For Environmental Additionality Technology / Measure Boundary Baseline Leakage Monitoring

56. IV. Concluding remarks

57. 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.

58. 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

59. Roberto C. Yap, S.J., Ph.D. Environmental Economist Climate Change Information Center Manila Observatory Ateneo de Manila University Tel +63 2 426-6144 Fax +63 2 426-6070 rcyap@ateneo.edu