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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. Contents. Importance of baselines in CDM Relevant studies needed in a CDM PDD Baseline methodologies

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CDM BASELINE METHODOLOGIES:The devil is in the detailsDENR Training CourseNovember 4-6, 2003Climate Change Information CenterManila ObservatoryAteneo de Manila University

contents
Contents
  • Importance of baselines in CDM
  • Relevant studies needed in a CDM PDD
  • Baseline methodologies
    • Procedures to determine project additionality
    • Procedures for calculating baseline emissions
    • Simplified methodologies for small-scale projects
  • Concluding remarks
cdm project
CDM Project
  • Achieves Sustainable Development objectives for the host developing country
  • Reduces GHG Emissions
clean development mechanism
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
What is the idea of the CDM?
  • ReduceGHG emissions in one countryto permit an equivalent quantity of GHG emissions in another country, without changing the global emission balance.
  • Emission Reductions (ERs) must:
    • Createreal, measurable,andlong-term benefits related to the mitigation of climate change. (KP Art. 12.5b)
    • Beadditionalto 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

Baseline scenarioCO2 emissions (that would occur)

Real, measurable and long-term

Additional CO2emissions reduction

CDM project CO2 emissions (observable)

Years

Basic notion of baselines

baseline study

cer a special product
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
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
  • 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
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
Project Additionality
  • Without the ability to register under the CDM, the proposed project would be, or would have been, unlikely to occur
project additionality1
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 additionality2
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
Environmental Additionality
  • If the proposed CDM project activity is not implemented, a less greenhouse gas friendly activity would have been initiated or continued instead.
environmental additionality1
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 additionality2
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
How to measure ERs?

CO2 Emissions

monitor using

  • time indicators and proxy variables

baseline emissions

(hypothetical, partly monitorable)

monitoring plan & calculation concept

Additional ERs

measure directly

  • or using emission indicators

project emissions

(actual)

Years

baseline methodologies1
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
what are the relevant questions
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

project design document
Project Design Document
  • Information on
  • project
  • project context
  • Kyoto Protocol
  • CDM M&P
  • etc.

Monitoring Plan (MP)

Project Design Document (PDD)

Project Activity Summary with Annexes:

Baseline Study (BLS)

Emission Reduction Study (ERS)

how to develop cdm baselines cdm m p
How to develop CDM baselines?(CDM M&P)

(45) A baseline shall be established …

  • using approved and new methodologies,
  • in a transparent and conservative manner,
  • on a project-specific basis,
  • using simplified procedures for small-scale projects,
  • 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 p1
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.
meth panel recommendations to eb july 2003
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 20031
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
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
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
slide31

CDM project

baseline

economic analysis of alternatives
Economic Analysis of Alternatives

CERs

Net Present Value

0

CDM Projects

Baseline

Options

economic analysis of alternatives1
Economic Analysis of Alternatives

CDM Project

Baseline: Lowest Cost

COST

Options

scenario analysis
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 analysis1
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
scenario analysis2
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
scenario analysis3
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
scenario analysis4
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
scenario analysis5
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
scenario analysis6
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
control group method
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 method1
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
combination of methods
Combination of Methods

No

Lower IRR?

Higher Costs?

Barriers?

Not Common Practice?

No

Not Additional

Yes

Yes

Additional

challenge of 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
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
CDM M&P Approaches(Para. 48)
  • Existing actual or historical emissions
  • Emissions from a technology that represents an economically attractive course of action, taking into account barriers to investment
  • 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
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
Meth Panel Recommendationno. 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
iii c small scale cdm projects

III.C Small-Scale CDM Projects

Simplified Baseline and Monitoring Methodologies

clean development mechanism1
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
type i renewable energy projects
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
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
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 for environmental additionality
Simplified methodologies forSmall-Scale CDM ProjectsFor Environmental Additionality
  • Technology / Measure
  • Boundary
  • Baseline
  • Leakage
  • Monitoring
interpretation of cop 7 guidance
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
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
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Thank you

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

[email protected]

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