CDM BASELINE METHODOLOGIES: The devil is in the details Climate Change Information Center Manila Observatory Ateneo de Manila University
Dec 28, 2015
CDM BASELINE METHODOLOGIES:The devil is in the details
Climate Change Information CenterManila ObservatoryAteneo de Manila University
Contents
I. Importance of baselines in CDM
II. Relevant studies needed in a CDM PDD
III. Baseline methodologiesA. Procedures to determine project additionality
B. Procedures for calculating baseline emissions
C. Simplified methodologies for small-scale projects
IV. Concluding remarks
I. The Importance of Baselines in CDM
CDM Project
• Achieves Sustainable Development objectives for the host developing country
• Reduces GHG Emissions
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?
• 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)
• => Integrity and credibility is critical
Basic notion of baselines
CO2 Emissions
CDM project CO2 emissions (observable)
Real, measurable and long-termAdditional CO2
emissions reduction
Years
Baseline scenario CO2 emissions (that would occur)
baseline
study
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?
• 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 is the key eligibility criterion in CDM projectsYou must do something that you would not
have done without the CDM
• Two types of additionality Project Additionality Environmental Additionality
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
• 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 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• 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 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?
CO2 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
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
II. Relevant Studies Needed in a CDM PDD
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
Baseline StudyBaseline Study(BLS)
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:
• => the most likely baseline scenario
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.
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• => Complete description of determined baseline
scenario and its development over time
Monitoring PlanMonitoring Plan(MP)
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
Emission Reduction StudyEmission Reduction Study(ERS)
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
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
III. Baseline methodologies
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)
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.
III.A Procedures to determine Project AdditionalityProject Additionality
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 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
• 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
• 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
Economic Analysis of Alternatives
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Options
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f R
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IRR without C revenues IRR with C revenues
baseline
CDM project
Economic Analysis of AlternativesN
et P
rese
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Val
ue
Options
0
CERs
CDM Projects Baseline
Economic Analysis of Alternatives
Options
CDM Project
Baseline: Lowest CostC
OST
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 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
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 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
III.B Procedures forcalculating baseline emissionscalculating 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
• 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)
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
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 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
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
III.C Small-Scale Small-Scale CDM Projects
SimplifiedSimplified Baseline and Monitoring Methodologies
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
• 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
• 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 forSmall-Scale CDM Projects
• Technology / Measure
• Boundary
• Baseline
• Leakage
• Monitoring
IV. Concluding remarks
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 …… 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
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