PCF Training

PCF Approaches to Additionality, Baselines, Validation and Verification

PCF Training Workshop, 19 November 2001

What do we want to achieve today?

Understanding of the PCFs approaches to
additionality and baselines, validation and verification/certification.

Case studies Feedback and open issues

Contents
I. II. III. IV. V. VI. Project Cycle: Overview Kyoto Protocol Provisions for Baselines PCF Baseline Development Special Issues with Baselines Validation, Verification and Certification Conclusions

Part I What are the basic concepts?

What is the idea of the CDM?

Reduce GHG emissions in one country to permit an equivalent quantity of GHG emissions in another country
without changing the global emission balance How to know how much has been reduced??

What is the PCF approach to additionality?

Environmental additionality is the relevant criterion Established as positive difference between
Baseline Emissions Project Emissions
___________________ = Emission Reductions (if > 0 , then additional)
(counterfactual)

(measurable) (to be verified)

Baseline and additionality

CO2

Baseline scenario CO2 emissions (would occur)

Baseline emissions

Additional CO2 emissions reduction

Real, measurable and long-term

Project emissions

CDM project CO2 emissions (observable)

Time

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

What do we mean by
Baseline method:
Systematic way to compare alternative baseline scenarios

Baseline scenarios:
All alternative plausible courses of development including the proposed project

Baseline:
Methodologically selected, most likely baseline scenario

Baseline emissions:
GHG emissions in the baseline scenario

What are baseline scenarios?

How can a particular product or service be provided?
Principle of service equivalence

Examples:
Electricity production using coal, natural gas, biomass, hydro etc. Heat production using individual boilers, district heating

What is the time profile of different technologies What is the regulatory and policy framework

How to measure emissions?

Project emission are directly observable / measurable Baseline emissions are hypothetical / counterfactual
But often real time indicators can help tell what would happen

Develop a Monitoring Plan Take measurements / monitor emission indicators Calculate / assess baseline and project emissions

How to be sure that emission reductions are real, measurable and long-term?
Baseline Study Monitoring and Verification Plan Validate
(before project construction)

Monitoring records Emission reduction calculations Audit / Verify / Certify

(during project operation)

Part II What does the Kyoto Protocol say about baselines?

What does the Kyoto Protocol say about baselines?

Criteria for CDM projects:
Real, measurable, and long-term benefits related to the mitigation of climate change. (Art. 12.5b) Reduction in emissions that are additional to any that would occur in the absence of the certified project activity. (Art. 12.5c)

Modalities / guidelines elaborated by the Conference of the Parties.

What guidance do the CDM modalities provide?

43. 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.
46. 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. 47. The baseline shall be defined in a way that CERs cannot be earned for decreases in activity levels outside the project activity or due to force majeure.

What do the CDM modalities say about baseline scenarios?

44. 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. A baseline shall cover emissions from all gases, sectors and source categories listed in Annex A within the project boundary.

A baseline shall be deemed

to reasonably represent the anthropogenic emissions by sources that would occur in the absence of the proposed project activity if it is derived using a baseline methodology referred to [as follows].

What do the CDM modalities say about baseline methods?

45. A baseline shall be established:
(a) By project participants in accordance with provisions for the use of approved and new methodologies []; (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.

What do the CDM modalities say about baseline methods? (contd)

48. In choosing a baseline methodology [] 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.

What about the crediting period?

49. Project participants shall select a crediting period for a proposed project activity from one of the following alternative approaches: (a) A maximum of seven years which may be renewed at most two times, provided that, for each renewal, a designated operational entity determines and informs the executive board that the original project baseline is still valid or has been updated taking account of new data where applicable; or (b) A maximum of ten years with no option of renewal.

Any guidance on leakage and boundaries?

50. Reductions in anthropogenic emissions by sources shall be adjusted for leakage []. 51. Leakage is defined as the net change of anthropogenic emissions by sources of greenhouse gases which occurs outside the project boundary, and which is measurable and attributable to the CDM project activity. 52. The project boundary shall encompass all anthropogenic emissions by sources of greenhouse gases under the control of the project participants that are significant and reasonably attributable to the CDM project activity.

Part III How does the PCF determine project baselines?

How does the PCF system for baseline establishment work?

At Project Idea Note (PIN) stage
Baseline discussions with PCF team

Preparation of Project Concept Note (PCN)

Discussions with project proponent Possibly reconnaissance missions

After PCN
Formal Baseline Study (BLS) Monitoring and Verification Protocol (MVP) Emission Reduction Projection Validation

What is the purpose of the baseline study?

The baseline study
Is a systematic and methodological analysis to determine the most likely development scenario and its evolution in time in absence of the Kyoto Protocol mechanisms. Is the basis for the projection of emission reductions. Credibly demonstrates environmental additionality. Provides all arguments, facts and evidence in support of the determined project baseline, so that the baseline can be validated.

PCF baseline process

Criteria for baseline method selection
Possible baseline methods Baseline method selected Plausible baseline scenarios Baseline scenario selected Information on project project context Kyoto Protocol

etc.

Monitoring and Verification Protocol

Project specific tools and instructions on emission related data socio-environmental impacts quality assurance verification

Some criteria of baseline method selection

Type of problem:
Major one of a kind fixed-asset investment Demand side intervention: many consumers

Size of investments
E.g., small project rules?

Availability / accessibility of information

E.g., can risks be quantified?

Costs of methods Note: Baseline method depends on identified (supply/service) problem, not on proposed project.

Which baseline methods has the PCF applied to date?

Project-by-project methods
Investment / financial analysis Scenario analysis Control groups Expert opinion Latvia, Morocco, Chile Uganda (Brazil, Latvia MVP) (Uganda BLS)

Standard-oriented methods
Sectoral baselines, benchmarks (Costa Rica, Chile) Technology matrix, default baselines, Top-down baseline, ... Require political decisions

Hybrid methods
Political guidance on key parameters Guidance on how to treat policy decisions (policy baselines)

Investment Analysis

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).

 and World Bank practice

Prepare financial model or cost-benefit model. Calculate comparator: risk adjusted IRR or NPV or net benefit or least cost for each alternative. Use comparator to rank projects. Select highest ranking project as baseline. => Use Word Bank good practice.

How has the PCF applied investment / financial analysis?

Example: Latvia
Objective: solve waste management problem in Liepaja The project was treated as a private sector investment Plausible investment scenarios were described and analyzed by Task Manager in a feasibility study Financial and Economic IRRs were provided Ranking of alternatives with and without carbon value Baseline: highest IRR without carbon value Project: highest IRR with carbon value

How has the PCF applied investment / financial analysis?

Example: Latvia waste management
Liepaja: Economic Analysis of Alternatives PCF project
Baseline

6.00%

Internal Rate of Return

5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 1 2 3 4 5 6

Options IRR without C revenues IRR with C revenues

How has the PCF applied the least cost method?

Examples: Morocco, Chile
A public (Morocco) or a private (Chile) sector project? A comparison of investment alternatives on the basis of cost per kWh is typically used in power projects planning. The PCF methodology examines the:
Expansion plan: Additionality of investment
What is the next system expansion? What is the systems long-run marginal cost? When would the proposed project be implemented?

Dispatch model: Emission reductions

Which power source is displaced at the operating margin?

MVP bases verifiable ERs on observed dispatch.

Chile: 5th Region Generation and Dispatch to Meet Future Demand (to scale)
GWh
18,000 16,000

New 300 MW CC plants

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
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

Scenario Analysis

Scenario analysis is difficult

Not very well defined as a methodology. Use if non-economic constraints are predominant Employ a multi-dimensional, risk-based scenario analysis, to identify most likely course of development Attempt to understand and describe all aspects and circumstances that contribute to an investment decision, in particular risks and other barriers Combine with other methods if available (e.g. costs) Provide data and/or expert opinions and references that can be confirmed by a validator. Note: The project proponents or consultants beliefs or simple statements cannot be validated.

How has the PCF used scenario analysis?

Example: Uganda small hydropower
A typical electric power development project. -- Plausible project alternatives:
Business-as-usual small-scale inefficient diesel generation Grid interconnection with main grid Regional hydropower development

Simple, not risk-adjusted cost-per-kWh ranking shows that

current situation (small private diesel gensets) is most expensive investor needed (West Nile population unable to make investment) grid extension to West Nile is cheapest, and proposed hydro-project ranks second cheapest

But: Non-economic constraints and barriers are predominant

Investment / financial analysis overshadowed by high non-quantifiable risks (which drive the baseline). Suitable control groups not available.

How has the PCF used scenario analysis? (Contd?)

Example: Uganda (contd)
Undertake multi-dimensional, risk-based scenario analysis
Investment risks (expert opinion), cost analysis, market structure Current situation (small gensets) is least risky: baseline

Multi-dimensional, risk-based scenario analysis identifies and describes reasons, why

grid extension is currently not a feasible option current situation (small gensets) would persist

Baseline study backs these findings with confirmable information (e.g., expert opinion) MVP checks if baseline study claims remain valid
Indicators for grid extension and major fixed-asset investment in West Nile region

Control Groups

How to use control groups?

Two types of control groups
Different group of consumers or facilities that are not involved in and/or affected by the CDM project Same group of consumers or facilities before implementation of proposed project (historic baseline)

Control group must be situation-specific

The selected control group is the baseline: Describe the baseline! Must be similar in all aspects but for the CDM project Often complicated, but can be combined with other methods Useful for projects with large number of units (e.g. households)

How to use control groups?

Contd
MVP to measure critical control group indicators
If possible, use observed control group emissions as baseline emissions Combine control group data with other relevant data in project area, such as activity level

Distinguish two questions:

What is the quantity of baseline emissions?
Decreasing baseline emissions as members of control group switch to new technology? Replace new technology in control group with old technology?

When does the baseline shift?

How many members of control group have to switch?

Has the PCF used control groups?

Example: Latvia, Uganda Not directly. But control group-like methods have been used to project and measure ERs
Uganda: Survey of private gensets and electricity demand to project growth. (historic control group) (baseline study) Latvia: When will landfills be used for power generation? (MVP) Uganda: When does a major non-removable investment occur in the region. (MVP)

We hope to experiment with control groups, for example:

Transport projects Demand side energy conservation projects

PLANTAR The proposed project

Example: Brazil Plantar: Charcoal for pig iron
Objective: To make charcoal from sustainably managed plantations a viable alternative to coal/coke in pig iron production Project:

23,100 ha of FSC certified fuel wood plantations on degraded pasture or old plantation lands: (3,300 ha x 7 years);
Cerrado forest ecosystem rehabilitation: 478 ha

Improved Charcoal production (reducing methane, and local air pollution from condensable oils/tars, and particulates)
Charcoal displacing Coal/Coke in Blast Furnace Pig iron production

Which baseline approach for Plantar?

Example: Brazil Plantar: Charcoal for pig iron Fuel-Switching Component
Scenario analysis based on historical trends Investment constraints (most plausible approach is not financable without carbon)

Charcoal Production Emissions Reductions

Control group of 10 peers in pig iron industry; included in MVP as baseline indicator ( >50% rule )

Cerrado Rehabilitation
Scenario analysis based on historical trends Investment analysis (if needed)

Standard Baselines

How would standard-oriented baselines work?

Objective:
simplify baseline determination for project developer reduce transaction costs and risks for investor control gaming

Tool:
public provision of pre-approved baselines for project categories (not yet available)

Philosophy:
additionality on average political decision (equity, development priorities) research and pilot application in concrete projects

For instance benchmarks

Prepared for fairly homogeneous category of projects / technology / circumstances, a sector, power grid etc. Often based on activity level / efficiency
For instance: baseline benchmark in kg coal/kWh

Methods
historic: average energy efficiency in power sector (last five years) present: efficiency of latest addition to grid projection: expected technology Country/region-specific: local circumstances, energy policies etc.

Needs proof that

benchmark is applicable, because project falls in project category

Has the PCF used standard baselines?

Example: Costa Rica small renewables
Not directly: Baseline standards are highly political. But sector-wide analysis supports small independent power projects
BLS: System-wide cost benchmark based on characteristics of national power system and expansion plan MVP: Carbon intensity factor for marginal / displaced power in power sector based on observed dispatch behavior

Simplified approach for each small project

bls: Generation cost higher then benchmark additionality mvp: kWh output times carbon intensity factor ERs

Part IV: Which special baseline problems has the PCF encountered?

Conservative estimates Project time horizon / crediting time Dynamic baselines? ODA Power systems Cross-border reductions Policy baselines & perverse incentives Development related emission Leakage Small projects

Does the PCF use dynamic baselines?

No. But the PCF recognizes that baseline scenarios evolves in time
E.g., the PCF project may go forward anyway in X years Latvia must comply with EU law in Y years.

The baseline study

discusses the time dimension of the baseline identifies possible shifts in activity levels and baseline scenarios

The MVP
includes indicators for activity levels and baseline shifts adjusts baseline emissions accordingly

PCF baselines are

constant regarding baseline methods and technical parameters variable regarding activity levels and anticipated types of activities

000 Tons Carbon

100 120 20 40 60 80 0
PCF ERs Additional ERs

20 02 04 06 08 10 12 14 16 18 20 20 20 20 22 24 20 20 20 20 20 20 20 20

Morocco Wind Farm Project

How do we think about PCF projects in power systems?

System capacity Dispatch margin

Thermal

Dispatch

Hydro

Base load

Coal

Coal

Wind

additional?

Base load capacity replacement

Major capacity addition (Morocco)

Micro capacity addition (Costa Rica)

How do we deal with GHG reductions that occur in another country?

Latvia
ER occur in neighboring countries due to lower power imports. PCF decided not to buy these reductions.

Costa Rica
Central American power pool becomes operational during project lifetime. Project depends on ERs from the entire power pool. What to do?

Swaziland
ERs can only be generated by backing out coal-based power imports from South African. A political issue?

What does the PCF think about development assistance in projects?

The possibility that projects may be financed with ODA must not make them non-additional. The PCF does not consider ODA in determining the baseline. ODA should fill the financing gap after the project has obtained revenues from selling ERs. At current low carbon prices, many renewable projects must be topped up with ODA. It seems that ODA cannot be used to purchase ERs. => Can we consider projects with ODA automatically additional?

How should the PCF deal with the issue of perverse incentives?
Punish a country for good policies and laws, if those policies are driven by domestic benefits?
What if these policies and not enforced / enforceable? What if they are in excess of national interests? What if they are just right but might be relaxed to access CDM funds?

Reward a country for bad policies?

What if national standards are insufficient to meet domestic needs? What if insufficient national policies / standards are driven by desire to increase flow of carbon finance?

Where does the PCF face the policy baseline problem?

Latvia
Prepares for EU accession Solved: No legal obligation to collect LFG until accession

Morocco
Wants wind energy to increase supply security Proved irrelevant: Morocco unwilling to go ahead with project without concessional finance

Uganda
Wants to develop the West Nile region, politically important Irrelevant: No willingness and ability to subsidies as needed, ODA fills gap.

Costa Rica
Has priority for expensive hydro power in its expansion plan Raises cost benchmark for small hydro power projects, makes them nonadditional.

How does the PCF deal with baselines in small projects?

- Bundling of similar small projects in one country - Project intermediation (e.g. through ESCOs) - Standardization of project documents
- Sectoral baseline and MVP, e.g. carbon efficiency in power pool applied to mini-hydro power - Standard baseline study and MVP for sub-projects - One validation and verification process for the sector and for all sub-projects - Standard carbon purchase contracts

- Kyoto Protocol small project rules

Part V: How does the PCF handle validation, verification and certification

Which at are the PCFs key project design documents?

Project Design Document Baseline Study Monitoring and Verification Protocol (MVP) Emissions Reduction (ER) Projections Other background documents

Why is the MVP important?

creates transparence, reliability, verifiability, and credibility.
Serves as a project-specific performance standard. Is a performance monitoring and measurement tool.

provides a consistent and (to be) validated system for the flexible, yet conservative determination of ERs.
performance criteria, observable indicators, measurement methods, default parameters, technical equations, record keeping systems, ER model and calculation procedures

determines clear responsibilities for all parties. can be adapted to a variety of CDM projects.

What does the MVP contain?

1. Instructions for systematic monitoring and recording of emissions related data for baseline and project case. 2. A models and tools for the calculation of ERs. 3. Targets and monitoring instructions for social, environmental, and development indicators as a measure of sustainable development. 4. Instructions for the management and quality control of the monitoring system. 5. Guidance for the verification of ERs.

What do we mean by validation?

An independent assessment of project design and compliance with a set of criteria.
Baseline/additionality/leakage Sustainable development Other criteria, e.g., stakeholder participation, environmental impact assessment, host country approval

Carried out by qualified (accredited) independent private sector (operational) entity (validator). Successful validation is pre-requisite for project registration by CDM Executive Board (EB).

What are validation prerequisites?

Full project preparation
technical, political, financial

Project design documents

most important: Baseline Study and MVP

PCF Preliminary Validation Protocol (PVM)

Validation guidelines Table of requirements Template for validation opinion

How does the validation process work?

Selection of independent validator by PCF Submission of project documents Review and amendment of Validation Protocol
Revised rules and modalities?

Validation procedure
Desk review of documents Interviews, possibly project visit, other evidence Input from concerned parties Draft validation report Clarification of issues, adjustment of project design and documents by PCF, resubmission of documents

Final validation report and opinion

What does project implementation and commissioning involve?

Project operator implements MVP
Set up of monitoring system Train monitoring and record keeping staff Implement quality control system Ready to monitor baseline and project performance data

Initial Verification
Qualified (accredited) independent private sector (Operational) Entity (auditor/verifier), not project validator. Verifies & confirms readiness of project and quality management and assurance system to generate and monitor ERs Adjustments to MVP if needed Establish relationship with operator

Project commissioned to produce ERs

How is monitoring done?

Monitoring during operation is responsibility of project operator To be carried out in full compliance with MVP Read meters, collect and record data, undertake surveys etc. Complete self-calculating spreadsheets Store records (paper trail) Report to PCF and host country authorities Follow quality management and assurance system Prepare for verification

What does verification involve?

Periodic assessment and confirmation that project has achieved a quantity of ERs in compliance with MVP and relevant project criteria Verifier (operational entity)
audits records, reviews interpretations, checks calculations reviews project performance and confirms (or determines) achieved quantity of ERs reviews continued validity of baseline, if required by MVP, checks compliance with MVP, reviews adequacy of MVP assesses proper handling of management, operational and quality assurance system drafts report, requires or suggests corrections, points out risks

What is certification?
Verifier issues written assurance (the certificate) that, during the verification period,
the project has achieved stated ERs, in compliance with all CDM and project performance criteria.

Certificate is legally binding statement, verifier is liable for professional work. Executive Board (or accreditation body) can undertake spot checks accreditation can be revoked.

How to receive emission reductions? Who reports?

Verifier informs CDM executive board and project participants of successful certification and delivers certificate. Executive board issues certified emission reductions (CERs) into national registries. PCF Participants receive CERs in their accounts in national registries. PCF and host country report periodically to UNFCCC Secretariat and/or CDM EB.

Part VI: Conclusion

Finally: What emerges

is a complex picture:
No single, but a hybrid mixture of methods Complexity depends on project design Unsolved political issues

Baseline study and MVP must be seen together

Rigorous, method-driven scenario forecasts in the baseline study as a basis for selection and application of monitoring tools for baseline and project emissions in the MVP

More experience and discussion is needed!

Early (PCF) projects will contribution to the evolution of the future methodology for CDM & JI projects Learning by doing concrete projects is way forward