UNFCCC How to address DOE Liability in context of PoA: Perspective of a Project Developer

1. UNFCCCHow to address DOE Liability in context of PoA: Perspective of a Project Developer  8th May 2011 Gareth Phillips Chairman, Project Developer Forum Chief Climate Change Officer, Sindicatum Carbon Capital Ltd

2. The current problem • Under the current rules, the DOE performing the CPA inclusion check is liable for CERs issued to incorrectly included CPAs • The extent of this liability could theoretically extend to cover all CPAs and could be back-dated to the start of the project • There are no clear guidelines for assessing “correct” inclusion of a CPA and • there are concerns that changes to rules, guidance, interpretation or methodologies may be applied retrospectively • Consequently, DOEs face un-manageable liability if they take on PoA validation contracts • This approach to liability is quite different from DOE liability for “normal” CDM projects and discriminates against PoA • Is this why no PoAs have posted monitoring reports to date? Project Developer Forum | UNFCCC Technical Workshop, Kiev

3. Possible solutions….. NOT • Pass the liability on to the Project Developer • For example, via creation of a reserve of CERs, or limits on the numbers of CERs, or via contractual liability • This is a non-starter from the PD’s point of view • PDs rely on the increased certainty and reduced risk with each stage of the CDM cycle in order to finance projects. Accepting this liability means PDs could not complete a deal until 2 yrs after the crediting period ends…. Project Developer Forum | UNFCCC Technical Workshop, Kiev

4. Proposed solutions…. possible • Scrutinize every CPA as if it were a PDD • This will give the DOE confidence that all included CPAs are eligible • This may be acceptable in certain situations such as PoA projects where the CPA eligibility criteria include setting the baseline and the demonstration of additionality • However, this is not a global solution to the problem as it will increase costs and transaction burden substantially and remove many of the advantages of PoA Project Developer Forum | UNFCCC Technical Workshop, Kiev

5. Proposed Solutions – Revise the procedures • The review of erroneous inclusion must be based on the same terms as review of a CDM project – fraud, malfeasance or incompetence on behalf of the DOE • The initial review should be restricted to reviewing the CPA(s) for which the request has been raised. Automatically extending the review to all CPAs, including those which have been included and may have issued CERs is similar to re-opening the registration of CDM projects using the same methodology after one has been rejected • Only in the case where the erroneous inclusion was shown to have been due to fraud or malfeasance on behalf of the DOE is it reasonable extend the review to all CPAs included by that DOE • Automatically revisiting the inclusion of CPAs based on new information or a new interpretation of guidance (aka DOE incompetence) is effectively retrospective application of rules Project Developer Forum | UNFCCC Technical Workshop, Kiev

6. Proposed Solutions – revise the procedures • Revise paragraph 9 of the Procedures for review of erroneous inclusion of a CPA (version 2) as follows: • The Board shall decide whether to initiate a review of the inclusion of the CPA and shall decide whether to exclude the CPA from the PoA with immediate effect, if it determines that the CPA does not meet the eligibility criteria specified in PoA DD and was erroneously included into the PoA with significant deficiencies related to fraud, malfeasance, or incompetence by the DOE. Changes to general CDM guidelines or PoA rules, which could have an impact on the assessment of the PoA eligibility criteria as defined in the PoA DD and become effective after the date of inclusion of a CPA, shall not lead to a retroactive determination by the Board of an erroneous inclusion. Project Developer Forum | UNFCCC Technical Workshop, Kiev

7. Proposed Solutions – revise the Procedures • Para 10: A DOE, that has not performed validation, registration, inclusion or verification functions with regard to this PoA shall conduct the review referred to in Paragraph 9 by assessing a random sample of 10% of all CPAs currently included and submit a report to the Board within 8 weeks. • 10 bis: If the Board determines that the erroneous inclusion was the result of incompetence, the Board will decide whether to exclude the CPA. If the Board determines that the erroneous inclusion was the result of fraud or malfeasance on behalf of the DOE, then a DOE that has not performed validation, registration, inclusion or verification functions with regard to this PoA shall conduct the review referred to in Paragraph 9 by assessing a random sample of 10% of all CPAs currently included and submit a report to the Board within 8 weeks. • 11: An Assessment team shall be established by the Board to analyze the DOE review report from paragraph 10bis and make a recommendation to Board within 2 weeks …. Project Developer Forum | UNFCCC Technical Workshop, Kiev

8. Proposed solutions continued • Under these proposals the DOEs will continue to carry the liability • But it will be significantly reduced • The DOE must decide for themselves how to assess compliance with the eligibility criteria, and at what level they chose to sample (but see next slide) • There will more equality between the treatment of “normal” CDM projects and PoA, whereby a review of inclusion is not automatically extended to all CPAs within the PoA – the extension is conditional on the DOE committing fraud or malfeasance • The PPs must realize that different technologies or baselines will require different levels of CPA assessment, incurring different costs Project Developer Forum | UNFCCC Technical Workshop, Kiev

9. Proposed solutions continued • In addition, DOE’s need better guidance on sampling for verification • DOEs need to have clear guidelines which they can apply without concerns about EB rejections • E.g. random selection of a minimum percentage of sites or sites accounting for a minimum percentage of CERs; CPAs may be stratified if necessary; second and subsequent stage sampling if material errors are detected. • These can in turn be used ensure verification proposals from DOEs are competitive and comparable Project Developer Forum | UNFCCC Technical Workshop, Kiev

10. Conclusion • The current procedures for verification of PoA are not working and if they remain unchanged, PoA will fail to deliver the envisaged scale up • Workable solutions are available but they need the EB to amend procedures and provide guidance and certainty • Such guidance will also help to define the kinds of projects which are well suited to PoA and those which are not Project Developer Forum | UNFCCC Technical Workshop, Kiev