Baselines and Additionality Executive Board decisions so far

Steve Thorne SouthSouthNorth

COP 9

5th December 2003

baselines

• The baseline for 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.

Baselines

Para 45 M&PA baseline shall be established:• (b) In a transparent and conservative manner regarding

the choice of approaches, assumptions, methodologies, parameters, data sources, key factors and additionality, and taking into account uncertainty;

• (c) On a project-specific basis;• (d) In the case of small-scale CDM project activities …in

accordance with simplified procedures developed for such activities;

• (e) Taking into account relevant national and/or sectoral policies and circumstances, such as sectoral reform initiatives, local fuel availability, power sector expansion plans, and the economic situation in the project sector.

Baselines

• Para 46 of M&P. The baseline may include a scenario where future anthropogenic emissions by sources are projected to rise above current levels, due to the specific circumstances of the host Party.

Additionality in the beginning…

• Environmental

• Investment

• Financial

• Technical

M&P Text

• Para 43 M&P: “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.”

How ODA was dealt with

• Preamble to Decision 17/CP.7: Modalities and procedures for a clean development mechanism as defined in Article 12 of the Kyoto Protocol

• “Emphasizing that public funding for clean development mechanism projects from Parties in Annex I is not to result in the diversion of official development assistance and is to be separate from and not counted towards the financial obligations of Parties included in Annex I”

ODA in the PDD

• A.4.5. Public funding of the project activity: “There is no Official Development Assistance in this project.”

• ANNEX 2: INFORMATION REGARDING PUBLIC FUNDING: “There is no Official Development Assistance in this project.”

Baseline and additionality in the M&P

• Para 48 of M&P: “In choosing a baseline methodology for a project activity, project participants shall select from among the following approaches the one deemed most appropriate for the project activity, taking into account any guidance by the executive board, and justify the appropriateness of their choice:

• (a) Existing actual or historical emissions, as applicable; or• (b) Emissions from a technology that represents an

economically attractive course of action, taking into account barriers to investment; or

• (c) The average emissions of similar project activities undertaken in the previous five years, in similar social, economic, environmental and technological circumstances, and whose performance is among the top 20 per cent of their category.”

Baseline and Additionality in PDD

• B.4. Description of how the anthropogenic emissions of GHG by sources are reduced below those that would have occurred in the absence of the registered CDM project activity:

• “Given that the results of the financial analysis conducted clearly show that that implementation of the this type of project is not the economically most attractive course of action and therefore this kind of project is not part of the baseline scenario, it is concluded that the **** Project is additional.”

Screens

• National and/or local legislation

• IRRs and NPVs are not bulletproof

• Second line of screening in the barrier tests

M&P barriers

Appendix A to Annex B• “1. Project participants shall provide an explanation to

show that the project activity would not have occurred anyway due to at least one of the following barriers:

• (a) Investment barrier: a financially more viable alternative to the project activity would have led to higher emissions;

• (b) Technological barrier: a less technologically advanced alternative to the project activity involves lower risks due to the performance uncertainty or low market share of the new technology adopted for the project activity and so would have led to higher emissions;

SS M&P barriers

• (c) Barrier due to prevailing practice: prevailing practice or existing regulatory or policy requirements would have led to implementation of a technology with higher emissions;

• (d) Other barriers: without the project activity, for another specific reason identified by the project participant, such as institutional barriers or limited information, managerial resources, organizational capacity, financial resources, or capacity to absorb new technologies, emissions would have been higher.”

SS Barriers in PDD

• B.3. Description of how the anthropogenic GHG emissions by sources are reduced below those that would have occurred in the absence of the registered CDM project activity (i.e. explanation of how and why this project is additional and therefore not the baseline scenario)

• (Justify that the proposed project activity qualifies to use simplified methodologies and is additional using Appendix A to Annex B of the simplified M&P for CDM small-scale project activities. )

• (National policies and circumstances relevant to the additionality of the proposed project activity shall be summarized here as well.)

So how has the EB used the M&P

• Step 1: submission of PDD plus methodology documentation to AE

• Step 2: Secretariat passes PDD plus to EB meth panel• Step 3: Meth panel assigns panelist and appoints 2 desk

reviewers to review methodologies using questionnaire in 10 days. Documents also published on website for public comment.

• Step 4: reviewers pass completed questionnaires to secretariat who pass it back to meth panel.

• Step 5: Meth panel assemble advice to the EB who decides on the validity of the methodologies and assign a, b or c.

• Step 6: Methodologies published for public scrutiny for 30 days.

Conclusions

• Baselines and additionality are intimately linked• The EB has interpreted the definition of

“additionality” (para 43 of M&P) in terms of both environment and financial

• The general rule is that a project is additional if it is not part of the baseline

• But tests are still not robust enough• Financial appraisals (IRRs and NPV) can be

misused as can the barrier tests• Who is investing, where investment happens, type

of project (technology, retrofit, and greenfield) affects the appetite for investment

Conclusions

• In using financial analysis for additionality tests requires higher (conservative) IRRs and lower NPVs

• The role of national/sectoral policy/regulation in baseline/additionality analysis

• International non-tariff implications can mask investment requirements in host countries

• Definitions of if/where ODA (public funding) can be used in the CDM still needs further definition

• Small-scale interpretations of baseline methodologies is slow

• In general the EB interpretation of additionality has enhanced the integrity of the CDM