CDM Methodology World Bank Carbon Finance: Interpretations and Approaches to Baselines, Monitoring a

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CDM MethodologyWorld Bank Carbon
FinanceInterpretations and Approaches to
Baselines, Monitoring and Calculation of
Emission Reductions

• Bonn, 6 June 2003Johannes Heister PCF, Carbon
  Finance Unit, World Bank

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Assumptions and Principles

• Know what we want to achieve.
• Do we have a common understanding of the
  objective?
• The world is a well-structured, intelligible
  place.
• Are we able to understand and predict human
  actions and developments through analysis and
  synthesis?
• Information (facts) plus rationality (reasoning).
• Are we able to collect a complete set of relevant
  observations and produce consistent arguments?
• Methodologies reduce complexity and need for
  judgments.
• Methodologies must have discriminatory power, but
  how do we choose the right methodology?
• Keep a skeptical mind.
• Are we willing to correct predictions on the
  basis of new observations?

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PCF baseline and monitoring philosophy

• Produce highly credible ERs
• carry a public premium they promote the CDM
• lack of integrity can damage the CDM.
• Experiment!
• find out what works as a methodology and for the
  CDM as a market based instrument (reasonable
  requirements)
• with transparency, methodological rigor and
  intellectual honesty (prototype)
• evolutionary approach be ready to change course
• Political dimension
• Baseline methods can have distributional
  implications
• political guidance therefore necessary (EB,
  Parties)

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What are the basic concepts?
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What is the PCF approach to additionality and
baselines?

baseline study
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Emission ReductionsGenesis of a seemingly
simple idea
1995 Activities Implemented Jointly (AIJ) pilot
phase
Projects ? Emission Reductions

• Additionality criteria
• investment
• program
• financial
• regulatory
• technological
• emissions

• Baseline methods
• project specific
• standard baseline

?
1997 Kyoto Protocol Reductions in emissions
that are additional to any that would occur in
the absence of the certified project activity.
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Emission ReductionsGenesis of a seemingly
simple idea
2001 Marrakech Accord Environmental
additionality emission reductions
Baseline
scenario that represents emissions

• Baseline scenario
• project specific

Emission reductions estimate

• Additionality
• of a project

Another interpretation
Emissions baseline sector wide ? standard ?
Additionality (of a technology)
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Emission ReductionsGenesis of a seemingly
simple idea
2003 Project Design Document Project
additionality Description of how the
baseline methodology addresses the calculation of
baseline emissions and the determination of
project additionality 5th Methodology Panel
Emissions baseline Ex post calculations of
baseline emission rates shall not be used. The
baseline emission rates must be calculated and
reported ex ante.

• Project additionality
• but-for test?

• Emissions baseline
• Ex ante projection,
• conservativeness

Emission reductions calculation
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Issues

• Project versus environmental additionality gt
  but-for test or stylized baseline
  methodologies?
• Ex ante factors conservativenessgt or
  monitoring and ex post factors
• Scope of methodologiesgt role of Operational
  Entities
• PDD Format

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COP-7 defined baseline for CDM
What is a baseline ??

• (44) The baseline is the scenario that
• reasonably represents GHG emissions that would
  occur in the absence of the proposed project
  activity

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Scenario defined

• Websters dictionary
• A sequence of events especially imagined.
• An account or synopsis of a possible course of
  actions or events.

Baseline scenario defined
WB CF definition ? The the most likely course
of action and development over
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PCF baseline scenarios defined

• The relevant baseline scenario is the most likely
  course of action and development over time.
• The baseline scenario can include development
  alternatives that may be realized at yet unknown
  points in time, if such developments can
  reasonably be anticipated.
• The baseline scenario is not an emissions
  baseline (such as an emissions factor).

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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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Why is a monitoring methodology important?

• More information on how a baseline scenario
  develops becomes available over time. (Increased
  credibility)
• The monitoring concept can deal with issues that
  the baseline study cannot address. (Reduced
  complexity)
• A good monitoring concept ensures the credibility
  and verifiability of the maximum number of ERs.
  (Less conservative)

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Two components of monitoring plans

• Emission reduction calculation concept
• Rational and assumptions
• Variables, parameters, formulae
• Instructions for data collection
• gt For project and for baseline, too?

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WB Carbon Finance project design involves three
distinct elements.
Baseline scenario
Calculation concept
Emission reductions
Monitoring Plan
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How to project ERs

• Use the project design (baseline, calculation
  concept)
• Make reasonable assumptions about the data to be
  monitored
• Run the calculation tool (spreadsheets)

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What is the Emission Reduction Study?

• Forecasts
• emissions in baseline scenario
• emissions in project scenario
• expected emission reductions
• Establishes environmental additionality
• Provides structured risk information by
  simulating ER calculation (sensitivity analysis)
• Is a basis for informed negotiations

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Summary of steps PCF document system

Project Design Document (PDD)
Baseline method
Baseline Study (What is the baseline scenario?)
Monitoring method

• Monitoring Plan
• (How to measure ERs?)

Emission Reduction Study (How many ERs to expect?)
ER Simulation
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Baseline Study
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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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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 scenarios
Possible baseline methods
Constraints and requirements
Criteria for baseline method selection
Plausible baseline scenarios (shortlist)
Baseline method selected and justified
Baseline scenariodetermined
Monitoring and ER calculation concept
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Ten rules on baselines

• Each project must have a baseline.
• The baseline must be established on a
  project-specific basis (for now), and in a
  transparent and conservative manner.
• The baseline is the scenario that describes the
  most likely course of action and development in
  time (including alternative futures if
  anticipated and observable).
• Scenarios are concrete a sequence of decisions
  and events, a physical configuration, not simply
  a trend or a projection (of emissions) or an
  emissions baseline.
• The baseline scenario is selected from a number
  of plausible scenarios, which must include the
  proposed project.

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Ten rules on baselines

• The selection is made by applying an appropriate
  baseline method, which builds on one of the
  Marrakesh approaches.
• The baseline method must be justified it must be
  an appropriate simulation of the decision making
  regarding the proposed project.
• Environmental additionality is the only
  relevant additionality criterion it requires
  only to show that the difference between
  projected baseline and project emissions is
  positive.
• Aspects of both the project and the baseline
  scenario should be monitored, wherever possible
  at reasonable costs.
• Baseline determination and monitoring /
  calculation of emission reductions is done by
  different, yet complementary methods.

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Methodology for grid-connected power projects
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Power Sector Projects
System capacity
Thermal
Dispatchmargin
Dispatch
Hydro
Base load
Coal
Coal
Wind
additional?
Base load capacity replacement
Major capacity addition
Micro capacity addition
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Grid connected power projects

• Project expands generation capacity
• Baseline scenario often well known usually
• the existing power grid and generation capacity
• plus the power expansions path over time
• Often unknown Would the project be part of
  system expansion? I.e. part of the baseline
  scenario?
• Cost / kWh test Are generation costs higher than
  alternative options?

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Baselines for power projects

• Comparison of investment alternatives on the
  basis of cost per kWh is typically used in
  planning of power system expansions.
• Since there are only two alternative scenarios
• The power system with the project
• The power system without the project
• ? a cost criterion is used to determine the
  baseline scenario.
• ? Methodology step-by-step instruction on how to
  use the criterion

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Three least cost baseline methods for power
projects

• Run expansion planning model with project
• ? is project not being picked up by the model?
• Use expansion planning model to determine
  long-run marginal cost (LRMC)
• ? is project cost (per kWh) higher than LRMC?
• Determine low/least cost project to represent
  expansion option
• ? is project cost higher than cost of
  comparable expansion option?
• gt If yes the baseline is the power system
  without the proposed project

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Calculation concepts for power sector emissions
reductions?

• Project-by-project dispatch margin analysis?
• Ex post monitoring Which power source is
  displaced at the operating margin?
• Central coordination to prevent double counting
  of displaced marginal generation
• Sector averages, e.g. combined build and
  operating margin
• Simple and inexpensive, no central coordination
  needed
• Can grossly over- or underestimate actual ERs
• Ex post vs. ex ante emission factors

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Chile 5th Region Generation and Dispatch to Meet
Future Demand (to scale)
GWh
Year
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• Thank you! Questions?

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