CDM Methodology

World Bank Carbon Finance:Interpretations and Approaches to

Baselines, Monitoring and Calculation of Emission Reductions

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

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?

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)

What are the basic concepts?

What is the PCF approach to additionality and 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

Emission Reductions:Genesis of a seemingly simple idea

Additionality: criteriainvestment

program

financial

regulatory

technological

emissions

Baseline: methodsproject specific

standard baseline

1995: Activities Implemented Jointly (AIJ) pilot phase

?

Projects Emission Reductions

1997 Kyoto Protocol: “Reductions in emissions that are additional to any that would occur in the absence of the certified project activity.”

Emission Reductions:Genesis of a seemingly simple idea

Additionality

of a project

Baseline scenario

project specific

2001: Marrakech Accord: “Environmental additionality”: = emission reductions Baseline: = scenario that represents emissions …

Another interpretation:

Emission reductions

estimate

Emissions baseline

sector wide ?

standard ?Additionality

(of a technology)

Emission Reductions:Genesis of a seemingly simple idea

Emissions baseline

Ex ante projection,

conservativeness

Project additionality

“but-for” test?

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.

Emission reductions

calculation

Issues

• Project versus environmental additionality: => but-for test or “stylized” baseline methodologies?

• Ex ante factors & conservativeness:=> or monitoring and ex post factors

• Scope of methodologies=> role of Operational Entities

• PDD Format

COP-7 – defined baseline for CDM

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

What is a baseline ??

Scenario defined

Webster’s dictionary:– A sequence of events especially imagined.– An account or synopsis of a possible course of

actions or events.

WB CF definition:

The the most likely course of action and development over

Baseline scenario 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).

PCF – baseline scenarios defined:

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

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)

Two components of monitoring plans

1. Emission reduction calculation concept– Rational and assumptions– Variables, parameters, formulae

2. Instructions for data collection

===> For project – and for baseline, too?

Baseline scenario Calculation concept

Monitoring Plan

Emission reductions

WB Carbon Finance: project design involves three distinct elements.

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)

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

Summary of steps & PCF document system

Project Design Document (PDD)Project Design Document (PDD)

Baseline Study(What is the baseline scenario?)

Baseline Study(What is the baseline scenario?)

Monitoring Plan(How to measure ERs?)

Monitoring Plan(How to measure ERs?)

Emission Reduction Study(How many ERs to expect?)

Emission Reduction Study(How many ERs to expect?)

Unit Equation Jan Feb Mar Apr

Gross electricity production kWh H

Volume of landfill gas sent to engines m3 X

Volume of landfill gas flared m3 C

Volume of landfill gas extracted from baseline wells m3 B

Volume of landfill gas extracted from project wells m3 A

Methane content of landfill gas (based on laboratory analysis)

Y

Generator heat rate kJ/kWh h

Proportion: gas combusted in flares (flare efficiency)

a 0.97 0.97 0.97 0.97

Calorific content of methane GJ/m3 j 0.037 0.037 0.037 0.037

Weight of methane t/m3 e 0.000714 0.000714 0.000714 0.000714

Global Warming Potential of methane

GWP/t f 23 23 23 23

Total energy input to engines GJ I = h*H/1000000 #REF! #REF! #REF! #REF!

Tons of methane combustedin engines

t J = (I/j )*e #REF! #REF! #REF! #REF!

Proportion: Methane in landfill gas (based on power output)

c = J / e * X

Tons of methane combusted in flares

t K = C*a*c*e 0 0 0 0

Proportion: contribution of project wells to total gas

k = (X+C-B) / (X+C)

#DIV/0! #DIV/0! #DIV/0! #DIV/0!

Net amount of methane avoided t M = (J+K)*k #REF! #REF! #REF! #REF!

Emission Reductions t CO2equ N = M*f #REF! #REF! #REF! #REF!

Data input: metered variables (Note: all flow data are monthly aggregates)

Calculation from electricity production (primary method)

Technical parameters

Years

monitoring plan

Years

monitoring plan

Baseline method

Monitoring method

ER Simulation

Baseline Study

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

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 methods

Baseline method selected and justified

Criteria for baseline method selection

Plausible baseline scenarios (shortlist)Plausible baseline scenarios (shortlist)

Baseline scenariodetermined

Baseline scenariodetermined

Possible baseline scenarios

Possible baseline scenarios

Constraints and requirements

Constraints and requirements

Monitoring and ER calculation concept

Ten rules on baselines

1. Each project must have a baseline.

2. The baseline must be established on a project-specific basis (for now), and in a transparent and conservative manner.

3. The baseline is the scenario that describes the most likely course of action and development in time (including alternative futures if anticipated and observable).

4. 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.

5. The baseline scenario is selected from a number of plausible scenarios, which must include the proposed project.

6. The selection is made by applying an appropriate baseline method, which builds on one of the Marrakesh approaches.

7. The baseline method must be justified: it must be an appropriate simulation of the decision making regarding the proposed project.

8. “Environmental” additionality is the only relevant additionality criterion; it requires only to show that the difference between projected baseline and project emissions is positive.

9. Aspects of both the project and the baseline scenario should be monitored, wherever possible at reasonable costs.

10. Baseline determination and monitoring / calculation of emission reductions is done by different, yet complementary methods.

Ten rules on baselines

Methodology for grid-connected power projects

Power Sector Projects

System capacity

Base load capacity replacement

Major capacity addition

Micro capacity addition

Base load

Dispatchmargin

Coal Coal Wind

Thermal

HydroDispatch

additional?

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?

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

Three least cost baseline methods for power projects

1. Run expansion planning model with project: is project not being picked up by the model?

2. Use expansion planning model to determine long-run marginal cost (LRMC):

is project cost (per kWh) higher than LRMC?3. Determine low/least cost project to represent expansion

option: is project cost higher than cost of comparable

expansion option?

=> If yes: the baseline is the power system without the proposed project

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

Chile: 5th Region Generation and Dispatch to Meet Future Demand (to scale)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Chacabuquito Existing Hydro Combined Cycle Dispatched Coal

GWh

Yea

r

New 300 MW CC plants

Project 1

kWh x EF

ERs

Σ kWh supplied by small projects electricity generation replaced by SPs

Emission Factor (EF) for avoided dispatch

Emission Factors for Avoided Grid Dispatch

Project 2

kWh x EF

ERs

Project 3

kWh x EF

ERs

Thank you! … & Questions?

http://www.carbonfinance.org