Creating the Carbon Asset:

PCF Approaches to Baselines and Additionality

Sao Paulo, Brazil

November 20-22, 2002

Preparation and Review of the Project

Preparation of project documents

(PDD, BLS, MP, ERS)

Validation Process

Negotiation of Project Agreements

Periodic Verification and Certification

Construction and Start-Up

Project Completion

PCF Project Cycle

Part IWhat is a Baseline?

A Baseline…

…represents the most likely course of action and development in the absence of the project

…is a counterfactual future development that provides the same services as the proposed project

….can never be directly observed

…is the benchmark against which project CO2e emissions are compared to estimate reductions achieved

It is not necessarily continuation of the status quo

CO2 Emissions

CDM project CO2 emissions

(observable)

Additional CO2 emissions reduction

Years

Baseline scenario CO2 emissions (that would occur)

Kyoto Protocol Requirements

Emission Reductions (ERs) must:

Create real, measurable, and long-term benefits related to the mitigation of climate change. (Art. 12.5b)

Be additional to any that would occur in the absence of the certified project activity. (Art. 12.5c)

Why is additionality important?

Country A Country B

Joint Implementation

Emissions Trading

CDM

Hot Air?

Baseline and additionality:two related concepts

If the project equals the baseline scenario,

the project is not additional.

also:

The project is additional if it reduces the amount of emissions vis-a-vis the baseline scenario.

Part II

Key Project Documents Required by the PCF

Key Documents and their Objectives

Project Design Document (PDD)Project Activity Summary and Annexes:

• Baseline Study (BLS) What is the most likely future scenario? Why will the project not be implemented without carbon

finance, or without the participation of the PCF? (additionality)

• Monitoring Plan (MP) How will the emission reductions be measured? What will be measured during the course of the project?

• Emission Reductions Study (ERS) How may emission reductions are expected during the

crediting period?

Baseline Study

How to figure out what baseline emissions are?

• Beliefs about what would happen are a starting point Possible baseline scenarios

• but beliefs are not sufficient: a methodological approach is needed, which can be tested Various baseline methods

_____________________________________

Determine the relevant baseline scenario

How to structure baseline studies?

Information about:

project

data

project context

Kyto Protocol

etc.

Possible baseline methodologies

Selection of baseline methodology

Possible baseline scenarios

Selection of baseline scenario

Criteria for baseline method selection,

In future: EB list of approved methodologies

An Example

• Proposed Project: methane recovery at a landfill

• Possible Scenarios– BAU: no methane recovery– Installation of 10 landfill gas wells as safety curtain – Project: Installation of 100 landfill gas wells

• Possible Baseline Methodologies – Financial Analysis / inversión– Scenario Analysis

Selection of relevant baseline scenario

What is a baseline methodology?

A baseline methodology is an application of one of the approaches outlined in para 48, Marrakesh Accords.

(48a) “existing actual or historical emissions”

(48b) “economically attractive course of action” and “taking into account barriers to investment”

(48c) “average emissions of similar activities, in previous 5 years, similar circumstance, top 20% performance”

Project proponents have to justify their approach…

Which baseline methods has the PCF applied to date?

• Project-by-project methods– Investment / financial analysis Latvia, Chile,

Colombia, Costa Rica

– Scenario analysis Nicaragua, Uganda

– Control groups Latvia– Expert opinion Uganda

• Standard-oriented methods (small projects)– Technology penetration threshold El Salvador– Technology standard Mauritius

Investment analysis is a rigorous approach ...

• Behavioral assumption: – Rational investor maximizes return on investment under given

constraints: financial analysis

– Public decision maker maximizes public benefit under given constraints: economic / cost-benefit analysis

• Baseline definition: – The baseline is the (time dependent) investment alternative

(scenario) with the highest IRR or the highest NPV or the lowest costs (all risk adjusted).

– not considering GHG emissions or the value of ERs.

… and an established methodology …

• Distinguish between private and public sector projects.

• Create a menu of investment alternatives (scenarios)– that deal with the problem on hand / satisfy an identified

demand (service equivalence). – include only plausible scenarios (constraints)– include zero investment scenario (BAU) and proposed

project– Include alternative investment start times

• Determine investment constraints and parameters (regulatory policy, costs, risks, etc. – but not ERs).

How has the PCF applied investment / financial analysis?

Example: Latvia – solid waste management• Treated as a private sector investment• Plausible investment scenarios were described and

analyzed by Task Manager in a feasibility study• Financial IRRs were provided• Ranking of alternatives with and without carbon value• Baseline: highest IRR without carbon value• Project: highest IRR with carbon value

Liepaja: Economic Analysis of Alternatives

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2.00%

3.00%

4.00%

5.00%

6.00%

1 2 3 4 5 6

Options

Inte

rnal

Rat

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f R

etu

rn

IRR without C revenues IRR with C revenues

Baseline

PCF project

Other Baseline Methodologies

Scenario Analysis • Attempt to understand and describe all aspects and

circumstances that contribute to an investment decision, in particular risks and other barriers

• Provide data and/or expert opinions and references that can be confirmed by a validator.

Control Groups • The selected control group is the baseline: Describe

the baseline!• Must be similar in all aspects but for the CDM

project

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 and crediting period• Leakage (and Permanence for sequestration projects)• Greenhouse gases covered• Environmental and social impacts• => Complete description of determined baseline scenario and its

development over time

Monitoring Plan

The Monitoring Plan…

… describes how to measure the emission reductions resulting from the project

… defines the monitoring obligations of the project operator

... becomes operational after project start

… serves as the basis for the verification of emission reductions

... is a legally binding document

The MP also contains spreadsheets to calculate the ERs

Sub-Project Name:

 

Date:   Hours Day

  Unit Equation 1 … 24 Sum (hours)

Carbon Intensity Factor

t CO2 / MWh

A       --

Reported Power Supply

MWh B        

Emission Reductions

t CO2 C = (A * B)

       

Emission Reduction Study

The Emission Reduction Study…

… Uses MP calculation tool (spreadsheet) to calculate baseline emissions, project emissions and ERs.

… projects expected baseline and project emissions and ERs for each crediting year

… provides structured risk information by simulating ER calculation (sensitivity analysis)

… provides the basis for informed negotiations

Baseline Exercise

Annex I:

Kyoto Protocol and Marrakech Accord on baselines and monitoring

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”,

– “covers emissions from all gases, sectors, sources in Annex A within project boundary”,

– is derived using an approved baseline method.

How to develop CDM baselines?

(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.

(48) Select baseline method …– that is deemed most appropriate,– that is consistent with guidance from Executive Board,– … and justify the choice.

COP-7 on CDM baseline approaches

(48a) “existing actual or historical emissions” defines BAU as baseline scenario and a historic control group as monitoring concept(48b) “economically attractive course of action” and “taking into account barriers to investment” defines an economic baseline method, such as investment analysis (IRR, least cost etc.)(48c) “average emissions of similar activities, in previous 5 years, similar circumstance, top 20% performance” defines build margin as baseline scenario and a standard control group as monitoring concept

What is the CDM crediting period?

Either:

(a) Either a maximum of ten years with no option of renewal.

Or:

(b) Three seven-year renewal periods (total of 21 years).

Condition for renewal:

Original project baseline is still valid or has been updated taking account of new data.

COP-7 on Monitoring

The monitoring plan must provide for the collection of all data necessary for

(a) estimating or measuring project emissions

(b)determining the baseline of emissions

The monitoring plan must describe the formulae used to

(a) calculate and to estimate project emissions

(b)calculate and to project baseline emissions

http://www.unfccc.org/cdm

The relevant COP7 texts and information on the sessions and decisions of the

CDM Executive Board are available at

Annex II:

PCF approach towards projects at an advanced stage of preparation

Criteria for project eligibility

A project will not be eligible for consideration for PCF

Financing unless the project sponsor is able to show that it has taken into account the opportunities presented by JI/CDM in the structuring of its financing and is aware of the requirements of these mechanisms including environmental additionality.

The project sponsor may demonstrate this by providing evidence of, among other things :

1. Contacts and substantive discussions with potential buyers of ERs prior to the conclusion of the financial package; OR

2. Exploration of the environment additionality of the project, e.g. by the initiation of a baseline assessment.