CDM BASELINE METHODOLOGIES: The devil is in the details Climate Change Information Center Manila Observatory Ateneo de Manila University

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CDM BASELINE METHODOLOGIESThe devil is in
the detailsClimate Change Information
CenterManila ObservatoryAteneo de Manila
University
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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

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I. The Importance of Baselines in CDM
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CDM Project

• Achieves Sustainable Development objectives for
  the host developing country
• Reduces GHG Emissions

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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

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What is the idea of the CDM?

• Reduce GHG emissions in one countryto 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)
• gt Integrity and credibility is critical

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Basic notion of baselines

baseline study
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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

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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

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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

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Baseline methodologies

• Evaluate
• Project Additionality
• Methodology (Meth) Panel Recommendation to
  Executive Board (EB), July 2003
• Environmental Additionality
• Marrakech Accords CDM Modalities and Procedures
  (MP), COP-7, 2001

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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.

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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.

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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 MP para. 43

Emission Reductionshypothetical baseline
emissions effective (project) emissions
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Environmental Additionality

• Forecast
• Baseline Emissions Project Emissions
• ___________________
• Emission Reductions (must be gt0)
• Environmental additionality if project is
  expected to generate a positive quantity of ERs.

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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
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Baseline methodologies

• Evaluate
• Project Additionality
• Methodology (Meth) Panel Recommendation to
  Executive Board (EB), July 2003
• Environmental Additionality
• Marrakech Accords CDM Modalities and Procedures
  (MP), COP-7, 2001

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II. Relevant Studies Needed in a CDM PDD
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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

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Baseline Study(BLS)
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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
• gt the most likely baseline scenario

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Purpose of the BLS

• The systematic determination and description of
  the baseline scenario,
• 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.

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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 sink projects)
• Greenhouse gases covered
• gt Complete description of determined baseline
  scenario and its development over time

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Monitoring Plan(MP)
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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

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Emission Reduction Study(ERS)
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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

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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

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III. Baseline methodologies
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How to develop CDM baselines?(CDM MP)

• (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)

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How to develop CDM baselines?(CDM MP)

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

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III.A Procedures to determine Project
Additionality
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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.

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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 ltx of
  similar cases) in the proposed area of
  implementation, and not required by
  recent/pending legislation/regulations.

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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

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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

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CDM project
baseline
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Economic Analysis of Alternatives
CERs
Net Present Value
0
CDM Projects
Baseline
Options
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Economic Analysis of Alternatives
CDM Project
Baseline Lowest Cost
COST
Options
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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

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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

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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

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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

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III.B Procedures forcalculating baseline
emissions
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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?

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CDM MP 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

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CDM MP Approaches(Para. 48)

1. Existing actual or historical emissions
2. Emissions from a technology that represents an
   economically attractive course of action, taking
   into account barriers to investment
3. 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

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Meth Panel Recommendation,no. 15, July 2003

• Since only one approach should be chosen in
  accordance with paragraph 48 of the CDM MP,
  developers are advised to select the one that
  most closely reflects the process used for
  calculating baseline emissions or baseline
  emission rates.

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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 MP apply to the approach
  used for calculating baseline emissions

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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

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III.C Small-Scale CDM Projects

• Simplified Baseline and Monitoring Methodologies

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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

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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

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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

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Simplified methodologies forSmall-Scale CDM
Projects

• Technology / Measure
• Boundary
• Baseline
• Leakage
• Monitoring

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IV. Concluding remarks
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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.

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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 [phone] Fax 63 2
426-6070 rcyapsj_at_observatory.ph