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

CDM BASELINE METHODOLOGIES: The devil is in the details 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 Procedures to determine project additionality

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

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  1. CDM BASELINE METHODOLOGIES:The devil is in the detailsClimate Change Information CenterManila ObservatoryAteneo de Manila University

  2. 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

  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? • 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

  7. CO2 Emissions Baseline scenarioCO2 emissions (that would occur) Real, measurable and long-term Additional CO2 emissions reduction CDM project CO2 emissions (observable) Years Basic notion of baselines 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 • 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.

  13. 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.

  14. 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

  15. 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.

  16. 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

  17. 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

  18. II. Relevant Studies Needed in a CDM PDD

  19. 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

  20. Baseline Study(BLS)

  21. 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

  22. 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.

  23. 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

  24. Monitoring Plan(MP)

  25. 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

  26. Emission Reduction Study(ERS)

  27. 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

  28. 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

  29. III. Baseline methodologies

  30. 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)

  31. 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.

  32. III.A Procedures to determine Project Additionality

  33. 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.

  34. 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.

  35. 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

  36. 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

  37. CDM project baseline

  38. Economic Analysis of Alternatives CERs Net Present Value 0 CDM Projects Baseline Options

  39. Economic Analysis of Alternatives CDM Project Baseline: Lowest Cost COST Options

  40. 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

  41. 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

  42. 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

  43. 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

  44. III.B Procedures forcalculating 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

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