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Key elements of CDM-PDD and CDM-NMB & Additionality Tool

Key elements of CDM-PDD and CDM-NMB & Additionality Tool. Sudhir Sharma Asian Institute of Technology, Thailand 4 April 2005. Presentation Structure. Key elements of Baseline Methodology CDM – New Methodology: Baseline (NMB) CDM – Project Design Document (PDD) Additionality Tool.

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Key elements of CDM-PDD and CDM-NMB & Additionality Tool

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  1. Key elements of CDM-PDD and CDM-NMB & Additionality Tool Sudhir Sharma Asian Institute of Technology, Thailand 4 April 2005

  2. Presentation Structure • Key elements of Baseline Methodology • CDM – New Methodology: Baseline (NMB) • CDM – Project Design Document (PDD) • Additionality Tool 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  3. Some Relevant Documents • http://cdm.unfccc.int/Reference/Documents • Guidelines for Completion of the Project Design Document (CDM-PDD), The Proposed New Methodology: Baseline (CDM-NMB), and The Proposed New Methodology: Monitoring (CDM-NMM). • Guidelines for completing CDM-AR-PDD, CDM-AR-NMB and CDM-AR-NMM (AR – Afforestation and Reforestation). • http://cdm.unfccc.int/Reference/Guidclarif • Guidance on CDM * Documents are regularly updated as new decisions/information become available. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  4. Key elements of Baseline Methodology • Basis for determining baseline scenario • An explanation how Baseline Scenario is chosen • Incorporating national/sectoral policies, programs etc. • Demonstrate that “ project activity is not the baseline scenario” – additionality test. • Estimating Baseline • Formulae/algorithm for estimating baseline emissions. • Project Boundary. • Types of variables used. • Temporal (vintage) and spatial scope of data. • Also includes • Basis of assessing leakage and leakage formulae/algorithm. • Formulae/algorithm for project emissions. • Data sources and assumptions • Data: spatial scope and vintage • How the data is obtained (requirement and sources)? BM should describe all the above aspects 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  5. Key informational elements of CDM-NMB • Overall structure of the CDM-NMB to highlight key informational elements • Briefly discuss the most observed comments made on the Methodology 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  6. CDM – NMB: Contents (1) • Identification of methodology • Title • List of project category to which applicable • Applicability conditions • Potential strengths/weakness • Overall summary description • Choice and justification of baseline approach • Approach chosen • Justification of the approach chosen 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  7. CDM – NMB: Contents (2) • Explanation and justification of the proposed new baseline methodology • Explanation of how baseline scenario is determined. • Demonstration of additionality. • How national/sectoral policies are taken into account. • Project Boundary. • Formulae for Baseline emissions • Formulae for Project emissions • Leakage. Main section where the components of Baseline Methodology are defined. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  8. CDM – NMB: Contents (3) • Data sources and assumptions • Describe parameters and assumptions • List of data used and sources. • Vintage of Data • Spatial level of Data. Tabulation helps in presentation. Also it helps check whether all the variables have been defined clearly. • Assessment of uncertainties • Explanation of how the baseline methodology was developed in a transparent and conservative manner 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  9. Identifying Baseline Scenario D E F I N E Survey of activities providing similar services as the Project Define Spatial Scope – local/regional/national Map tech/practices for Project Activity in Spatial Boundary Identify policies/regulations that influence choice of Technology/practices R E F I N E Identify programs for promoting resource conservation Technology/practices in the sector Drop/Add alternatives to Baseline Scenarios SELECT BASELINE SCENARIO: Baseline Approach 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  10. Baseline Approach • The three Baseline Approaches: • Emissions actual or historical. • Emissions of most economic options. • Weighted average of similar projects. • Choose one and only one of the three approaches • Justified choice on the following basis (Annex 1, Report EB10) • Consistent with the context of applicable project types. • Consistent with underlying algorithms and data sources used in baseline methodology. • One that most closely reflects the process used for calculating baseline emissions. Tool of additionality does not need to be linked to Approach. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  11. Baseline Approach • Guidance on Approach C. • If choosing C – should define • How is “similar social, economic, environmental, and technological circumstances” are defined. • How is “performance among the top 20 per cent of category” {defined as GHG emission per unit output} assessed. • Baseline emissions is • Output weighted average emissions of the top 20 per cent of similar project activities undertaken in the previous five years; or • Output-weighted average emissions of similar project activities undertaken in previous five years that are also in the top 20 per cent of all current operating projects; which ever results in conservative estimate 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  12. Evaluating BM using CDM-NMB 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  13. Evaluating BM: relevance • Applicability of BM • Conditions under which BM is applicable to a proposed projects. • Includes all the assumptions made. e,g. – Say assumption of “no law to capture methane from SLF” was made in identifying baseline scenario. The BM is applicable where ever this condition is fulfilled. • Helps check if methodology developed is suitable for proposed CDM project. • Strength and weakness • Evaluation of methodology vis-à-vis the existing approved methodologies. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  14. Evaluating BM: robustness • Transparency – Replicable based on CDM-PDD and CDM-NMB by reviewers • Clear statement of assumptions • Made in arriving at baseline scenario • Choosing values/data for variables/parameters • References for all the information used in developing methodology and its application in CDM-PDD • Conservativeness • Choice of assumptions and data for variables/parameters result in lower baseline emissions. • Choice of assumptions and data for variables/parameters for economic analysis result in optimistic outcome. • Assessment of uncertainty in baseline scenario • Related to assumption (e.g., certain policy is in place but is not implemented stringently) • Related to variables used in baseline emission estimation 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  15. Key informational elements of CDM-PDD 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  16. CDM: Project Design Document • General description of project activity • Application of Baseline methodology • Duration of the project activity / Crediting period • Application of Monitoring Methodology and Plan. • Estimation of GHG emissions by sources • Environmental impacts • Stakeholder’s comments Annexes Annex I: Contact Information on Participations in the Project activities Annex 2: Information regarding Public Funding Annex 3: Baseline Information Annex 4: Monitoring Plan Need not be filled at submission of NBM 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  17. General description of project activity • Description should cover • Main purpose of the project activity and its contribution to SD • Details of project activity – activity level, technology used, environmental features of technology, process details, etc. • Brief description of additionality of project - A description of national/sectoral context, relevant policies and implications, sectoral practices, etc. • A&R projects • Eligibility of activity – eligibility conditions • Carbons pools accounted for 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  18. B: Baseline methodology Describe outcome of application of methodology to Project B.1 Title and reference of the methodology applied to the project activity. B.1.1. Applicability of methodology to project. B.2 Description of how the methodology is applied • Report key information and data used in determining baseline scenario (table form). B.3 Additionality demonstration B.4 Project Boundary 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  19. E. Estimation of GHG emissions by sources E.1 Estimation of GHG emissions by sources • From project activity and within the project boundary. E.2 Estimated Leakage E.3 Project activity emissions = E1 + E2 E.4 Baseline emissions E.5 Emissions reduction = E4 – E3 • Information to be presented • Formulae • Data used • Emissions in CO2 equivalent • Estimation of each year of credit period Even if baseline calculated ex-post, ex-ante estimates of baseline should be reported. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  20. Conclusions • Important points to remember • NMB – description of the steps/procedure/formulae of a baseline methodology. • PDD – report application of baseline methodology to the specific project – submitted as demonstration of the methodology (Annex 3, EB09 Report). • Methodology for estimating area of given 3-D object with six faces: • Measure, length (l), width (w) and height (h) • Identify the shape of object: the rule • If l = w = h: cube • Else cuboids • Calculate area • If cube V = l3 • If cuboids V = l*w*h • Application of Methodology • l = 10 cm; w = 10 cm; h = 10 cm • Identify Shape • If l = w = h = 10 cm » cube • Calculate area • Since cube V = l3= 1000 CCM 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  21. Additionality Tool 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  22. Additionality Environment Additionality • Marrakech Accord • “A CDM project activity is additional if anthropogenic emissions of greenhouse gases by sources are reduced below those that would have occurred in the absence of the registered CDM project activity”. • EB09 Report, Annex 3, Para 2 • “a proposed new methodology shall explain how a project activity ….can demonstrate that it is additional i.e. is different from the baseline scenario” • Cop 10 – guidance to CDM • “Recallsthat, as indicated by the Executive Board, the use of the “Tool for the demonstration and assessment of additionality” is not mandatory for project participants” 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  23. STEP 0: Claiming credits for project with start date prior to date of registration – if not applicable go to step 1 directly CDM consideration proved: Pass STEP 1: Identification of alternatives consistent with current laws and regulations - If proposed CDM project only alternative left: NON-ADDITIONAL (NA) More than one alternative: Pass STEP 3: Barrier Analysis No barriers: NA STEP 2: Investment Analysis CDM financially attractive CDM financially not attractive CDM faces Barriers STEP 4: Common Practice Analysis – credibility check - If similar activity observed with no essential difference: Project NA No similar activity or similar activities present but difference in circumstances STEP 5: Impact of CDM registration - If CDM benefits have no impact: Project NA 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  24. Step 0 • If the crediting period starting prior to the registration of project activity, • only if CDM project activity • The starting date between 1 January 2000 and 18th January 2005 • submitted for registration before 31 December 2005 • Provide evidence that the incentive from the CDM was seriously considered in the decision to proceed with the project activity. • This evidence shall be based on (preferably official, legal and/or other corporate) documentation that was available to third parties at or prior to the start of the project activity. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  25. Step 1: Identifying Alternatives • Define alternatives including: • alternatives available to the project participants or similar project developers that provide outputs or services comparable with the proposed CDM project activity. • The proposed project activity • If applicable, continuation of the current situation • compliance with all applicable legal and regulatory requirements, • GHG laws, environment laws, investment laws, etc. • National and local policies that do not have legally-binding status not considered except • National/sectoral policies regulation that give comparative advantages to more emissions intensive options, implemented before 11 December 1997. • If not in Compliance, then show that, • applicable legal or regulatory requirements are systematically not enforced and that noncompliance is widespread in the country. • If this cannot be shown, then eliminate the alternative from further consideration; This is Similar to Identifying alternative Baseline Scenario step in selection of Baseline scenario. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  26. Step 2: Investment Analysis Any financial returns from project Other than the CER benefits? Yes No Use simple cost analysis Demonstrate costs and prove no benefits accrue Investment comparison Analysis Choose: IRR1, NPV, CB ratio Or unit cost of service ($/kWh) Benchmark Analysis Choose: IRR2, NPV, CB ratio Or unit cost of service ($/kWh) Choose Benchmark: GBR + Risk Premium, or Cost of Cap or Req. return Rate, or Company internal Benchmark Indicator of atleast One Alternative > CDM Project Indicator of CDM Project < Benchmark Sensitivity Analysis 1: Project or Equity IRR; 2: Project IRR, Equity IRR only if one Project Promoter 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  27. Financial analysis: some definitions • Net Present Value = • Internal Rate of Return, s.t. • Cost Benefit Ratio = 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  28. Financial analysis: some definitions • Unit cost of service: Levelized life-cycle cost • First calculate PV: The annual costs of project development, operation and decommissioning for each year over the economic life of the project. The resulting series of annual cash flows were discounted by a discount rate, then summed to a net present value. • Convert to annuity: Convert PV into a uniform series of annual cash flows using the same discount rate. • Estimated levelized cost: Divide the uniform annual cash flow by the estimated annual production. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  29. Step 2: Investment analysis • Government Bond – of appropriate maturity – source: government treasury • Risk premium • Equity market risk premium: equity research/market analysis groups – most appropriate for Equity IRR • Premium on loans for sector or project types – banking and financial institutions. • Required rate of return – Lending banks/financial institutes • Weighted average cost of capital – company specific 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  30. Step 2: Investment analysis • Sensitivity analysis: Factors in investment analysis • Fixed • Investment cost, debt-equity ratio, risk premiums, etc. • Terms of loan (interest rate, payment schedule, etc) • Capital subsidy, interest subsidy, sales tax or other tax breaks, etc. • Depreciation, tax laws, • Salvage value of equipment • Variables • Inputs costs, maintenance and operation costs, etc. • Revenue streams – price of outputs, output, etc. • Discount Rate – for NPV calculations – subjective value based on cost of money and risk perceptions. • These values should be varied to check robustness of estimates • Present the range of values that the variables can take – good practice. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  31. Step3: Barrier Analysis • Determine whether the proposed project activity faces barriers that: • (a) Prevent the implementation of this type of proposed project activity; and • (b) Do not prevent the implementation of at least one of the alternatives. Not enough to just identify barriers to project • Investment barriers (other than the economic/financial barriers in Step 2 above) • Debt funding is not available for this type of innovative project activities. • No access to international capital markets due to real or perceived risks 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  32. Step 3:Barrier Analysis • Technologicalbarriers • Skilled and/or properly trained labor not available • no education/training institution to provide the needed skill • Lack of infrastructure to supply spare parts • Risk perception • Lack of familiarity due to lack sufficient commercial demonstration. • Lack of risk sharing mechanism from vendors • Market conditions in the sector • Information • availability of sufficient and good quality information to make informed decision. Documentary proof – existing studies, studies undertaken by promoters while making decision, written expert judgment, etc. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  33. Step 4: Common Practice Analysis • Analysis of any other activities implemented previously or currently underway similar to the proposed project activity. • Projects are considered similar if • In the same country/region • Rely on a broadly similar technology, • Are of a similar scale, • and take place in a comparable environment ( regulatory framework, investment climate, access to technology, access to financing, etc.) DO NOT INCLUDE Other CDM project activities • DEMONSTRATE THE DIFFERENCES 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  34. Step 4: Common Practice Analysis • E.g – Grid connected Wind Project in India • Existing capacity already 1200 MW. • Difference could be based on • Most capacity in one or two states • Initial projects were captive power projects – the avoided cost higher than the price distributor pays. • Financial incentives available to projects have decreased – capital subsidy, sales tax benefits, accelerated depreciation benefit. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  35. Step 5: CDM Impact • How CDM Benefits help overcome the economic and financial hurdles (Step 2) or other identified barriers (Step 3), e.g, • CER benefits increase the IRR above threshold • CER revenues enables access to Debt funding which lowers the overall cost of funds for implementing the project. • Foreign participant with technology experience as partner and guarantor of performance due to CER benefit. • CER procured by foreign funder to meets its own requirement and, hence, its willingness to participate. • Helps access dollar loan to fund technology procurement. • Provides technical training for staff for operation and management. • Foreign participant has access to cheaper capital through decreased exchange rate risk due its participation. Key: List how CER/ CDM benefit helps address investment analysis (in step 2) and barriers listed (in step 3) for project. 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

  36. THANK YOU 4th Regional Workshop and Training on Capacity Development for the CDM April 4-5 , 2005, AITCC, AIT, Thailand

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