Determining Baselines and Additionality for CDM Projects

 

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1. As the AIJ experience has shown, baseline determination can be a source of
uncertainty and of high transaction costs in identifying GHG emissions reductions in cooperative implementation projects. Moreover, the absence of clear ground rules and guidelines for baseline assessment can inhibit private-sector participation in CDM and JI and prevent developing countries from playing a lead role in the project identification and development process. Given the importance of the industrial sector in both climate-change mitigation and the sustainable economic and social development of Member States, it is therefore not surprising that UNIDO is particularly interested in tackling the perceived complexities of baseline and additionality determination with a view to facilitating the identification and development of CDM/JI industrial projects that yield real, long-term and verifiable emissions reductions.

2. To that end, UNIDO has initiated a study entitled "Guidelines to Support Decision-making on Baseline-setting and Additionality Assessment for Industrial Projects". The objective of the study is to provide a foundation for the development of a methodological tool that supports the analysis of data and information for setting emissions baselines for industrial projects undertaken in the context of the project-based emissions reductions trading established under Articles 6 and 12 of the Kyoto Protocol.
Using AIJ projects as examples, the study develops a series of algorithms for baseline assessment using the subsystem disaggregation approach. This is an innovative approach to baseline setting and one that has not thus far been discussed in the literature on baselines.

3. The subsystem disaggregation approach is based on the disaggregation of the project into the sub-systems in which changes to the net GHG emissions occur. Such an approach allows the necessary rigor to ensure a full accounting of the GHG impacts of the proposed project activity as it carefully separates multiple causes and effects resulting in changes of GHG emissions. Such causes can often be multiple (and hence the need for sub-system disaggregation), as for example in a cogeneration project where the introduction of the cogeneration mode of energy generation will change the GHG intensity of both electricity and steam/heat and thus require different baselines for these two sub-systems. The sub-system disaggregation approach also permits a clear identification of the technical and financial parameters of each sub-system and a clear separation of overlying effects such as a decrease in coal consumption and an increase in electricity generation in projects addressing industrial energy efficiency in coke production.

4. This structured process towards a "tool-based" approach formalizes the baseline determination process also insofar as it fixes the information and data needs that need to be considered. The UNIDO study thus contributes towards the standardization of baseline setting based on state-of -the- art work on baselines available so far (i.e. the AIJ experience). The resulting product will provide the basis for a User Manual for Baseline Assessment and for software to aid project developers with baselines assessment. It is believed that this practical approach will make an important contribution to the development of flexible mechanisms by improving the quality of baseline assessment methods and by harmonizing the processes of project design. The latter will help to reduce the high transaction costs embodied in the uncertainty, time and risk associated with the potential failure of a project to generate certifiable reductions. It will maximize the implementation of high-quality climate-mitigation projects and improve comparability between projects, which will in turn facilitate the evolution of a project-based trading system.

5. The baseline determination algorithm outlined in the UNIDO study involves the following steps:
i. Project disaggregation into sub-system levels at which GHG emission reduction occurs;
ii. Selection of qualified baselines for every sub-system;
iii. Ranking of options, and
iv. Determination of baseline validity period and the variables that trigger baseline reviews.

The first step requires a clear understanding of the project system boundaries, project sub-systems and their effects on the project GHG inventory . The second step involves the selection of a baseline according to difference methods, including technology matrix, benchmarking, comparison-based and simulation based approaches. The third step requires the application of rules to determine which baseline on the sub-system level is most likely to have been replaced by the project. The baseline validity and its changes during the duration of the project are determined as a fourth step. The variables (both project-related and policy -related) that could trigger baseline changes are also identified.

Figure 1: A generic algorithm for the determination of baselines

6. The study defines the following criteria for assessing the additionality of project components.

i. Regulatory additionality check: Does the project component under examination meet all the existing legal/regulatory requirements?
ii. Technological additionality check: Does the project component under examination include elements of innovation beyond conventional practice and what is their impact on maintenance and/or supply chain?
iii. Market/competitiveness additionality check: How competitive is the output of the project component under examination within the local market?
iv. Economic additionality check: If emission reduction re not assigned a financial/economic value, how competitive are the unit production costs of the project component under examination?
v. Barrier removal and market transformation additionality check: Does the project component under examination introduce new regulatory practices, contribute to technology transfer, strengthens local manufacturing and maintenance capacities, introduce innovative financing, raise awareness regarding new products, technologies and practices, increase consumer demand/willingness to pay, or increase competitive pressure for technological change in the local market?
vi. Kyoto Protocol additionality check: Is there domestic legislation in place that can be used to qualify/disqualify the component under consideration and is the GHG inventory of the component compliant with national climate legislation to implement the Kyoto Protocol?

7. Under the CDM and JI, emissions reductions must be not only additional but also certified, real, long-term and measurable, which implies the need for monitoring, verification and certification activities and protocols. While the monitoring and evaluation of projects can be done by project developers themselves, certification and verification must be done by third parties (Article 12). The UNIDO study explores the link between the determination of project baselines and that of monitoring and verification protocols for controlling baselines and facilitating the certification of emissions reductions. ).

8. The UNIDO study links the determination of project baselines with that of monitoring and verification protocols for controlling baselines and facilitating the certification of emissions reductions. In the current literature on baselines, there has been a tendency to consider baselines and additionality analysis in isolation from the monitoring and verification systems. It would be more appropriate, particularly for capacity building purposes, to establish the link between the two procedures and to show that baselines determination is in fact an integral element of monitoring and verification model. This notion should in turn be appropriately reflected in guidelines on baselines and additionality setting

9. The preparation of a project-specific monitoring and verification protocol (MVP) should therefore be viewed as an activity closely linked with baseline determination. The project-monitoring domain is in fact similar to the system boundary identified in the context of the baseline-setting process. The monitoring protocol must measure relevant data for comparison with baseline emissions. In this context, it is UNIDO's position that capacity-building activities relating to baseline methodologies should also incorporate MVPs as part of the project-development process. The development of MVPs should also be reflected in the internationally recognized guidelines on project baseline-setting to provide an on-going guidance to project developers.

10. To ensure high-quality certification and consistency in the application of MRVC methodologies, an international accreditation entity may have to be created to ensure that accreditation practices reflect the state of the art and are applied consistently throughout the CDM/JI-participating countries. It is likely that the monitoring, verification and certification of emissions reductions will take on established industrial auditing practices for environmental and quality management systems. In this regard, UNIDO would like to ensure that its project experience and methodologies in capacity-building for the certification of management systems in developing countries will be usefully deployed for similar tasks in the context of GHG mitigation projects. UNIDO's objective in this context is to ensure that the technical capacities of the certifiers and certifying institutions in developing countries are on par with those of the leading international certification bodies in terms of technical skills and adherence to guidelines and standards.

11. As regards the strategic and operational criteria highlighted in the submissions of various institutions and governments, UNIDO is in full agreement with the need for ensuring credibility in the baseline selection, the environmental integrity of the reductions calculated from such a baseline, the additionality of emissions reductions in terms of those that could have been achieved without the project, and the consistency and transparency of the rules and procedures governing the process of baseline-setting. On the operational side, the quality of the baseline data and the quality of the monitoring and reporting protocols supporting their verification are crucial for ensuring the true environmental additionality of emissions reductions.