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How Does the CFB Approach Baseline and Additionality?
The CFB has applied financial and economic analysis to possible project alternatives and has used the maximum internal rate of return (IRR) or the least cost as baseline criterion. The CFB believes that, based on a profit or benefit maximizing behavioral model for investments in market economies, financial and economic analysis is a very rigorous and credible approach for many project types and circumstances. However, this approach cannot and should not claim exclusivity.
The CFB supports the development and application of other baseline methodologies such as control groups, barrier analysis and baseline standards. The CFB hopes that its experience with projects will contribute to the development and standardization of baselines as well as to political decision making regarding baselines. This seems to be particularly important in the context of the "case law approach" envisaged by the UNFCCC negotiation text on the CDM.
In its baseline work, the CFB applies a rule of conservative estimates and assumptions. This rule requires that wherever calculation factors, estimates or assumptions are in doubt, the more conservative factor/estimate/assumption must be used. Conservative in this context means that calculated and projected or claimed emission reductions are likely to underestimate the true emission reductions.
The CFB is eager to help develop simplified baseline procedures for small projects and contribute to the evolutionary development of new methods on a first-case basis and with approval of the CDM Executive Board or other convention bodies.
The CFB requires and supports a baseline study for each project. The baseline study must make a convincing case for a particular baseline scenario. It must select a baseline methodology, identify plausible project options and then apply the methodology to the these options in order to identify the most plausible alternative. The projected emissions in the baseline scenario and in the project case are then used to calculate expected emission reductions, which-if positive-deliver a proof of environmental additionality.
Overview of Submitted
Carbon Finance Business (CFB) Baseline Methodologies
In 2003, the CFB Fund Management Unit submitted eight
baseline and monitoring methodologies (along with seven
demonstration projects) to the CDM Executive Board for
approval. These methodologies were exclusively in the electricity
and waste management sectors:
- April-July-October 2003: The Methodology Panel recommended
and the Executive Board approved two waste
management project methodologies and invited resubmission
of one energy sector methodology.
- September-November 2003: Methodologies for one waste and three
energy sector projects were submitted. The EB approved one energy sector as well as one energy and one waste sector methodology contigent upon required changes. Another energy sector project is still under consideration.
The CFB experience indicates that the complexity of
methodologies depends on the sector to which they are
applied. The methodologies for most waste management
projects are relatively straightforward and employ a financial
analysis based on the expected rate of return, or a comparison
of the costs combined with direct monitoring of
captured landfill gas emissions to calculate reductions. The
methodology proposed by the CFB for modestly-sized electricity
projects seems less straightforward. The Executive
Board did not approve the CFB’s least-cost analysis that
describes the baseline scenario in connection with the
proposed monitoring of system expansion and marginal
dispatch, and identifies the system changes to calculate
emission reductions. (El Canada Hydro project)
In September 2003, the CFB submitted a methodology that
is similar to the one proposed for the El Canada project, but
enhanced with system expansion and dispatch models and
applied to a clearer demonstration project (Jepirachi Wind
Power). The CFB also submitted a power sector methodology
that uses a barrier analysis to determine additionality
combined with a simple formula to calculate a baseline emission
factor.
To date, the CDM Executive Board has approved a total of
six methodologies (view methodologies on the UNFCCC webpage). It is therefore difficult to predict which
proportion of the Prototype Carbon Fund (PCF) portfolio would be covered by
approved methodologies. Nevertheless, assuming that the
Executive Board approves the CDM methodologies the
World Bank has submitted so far, up to a third of the current
PCF portfolio may be covered. This ratio may further
improve if approved methods submitted by other project
developers will be applicable to PCF projects.
The CFB is now working on redesigning its portfolio of
small-scale projects, using the approved simplified modalities
and procedures. The PCF portfolio already includes
the first batch of projects that were developed using the
simplified modalities and procedures for grid-connected
power projects. The CFB will complete the validation of
these small-scale projects as soon as Operational Entities
have been accredited and designated.
The CFB’s methodologies for Joint Implementation projects
follow, in large part, the above ideas, in most cases
using some form of financial analysis. The CFB has developed
and obtained preliminary validation for two standard
methodologies, now used by the Czech authorities for small
energy efficiency and district heating projects in the PCF
portfolio. Methodologies for two public afforestation projects
were also developed.
In the months ahead, the CFB will submit further methodologies
to enhance the learning value and bring the PCF portfolio
nearer to closure. The Fund Management Unit is aiming to
have most of the PCF’s CDM projects officially validated by
a Designated Operational Entity and ready for registration
within the next twelve months. UNFCCC recognition of the
PCF’s Joint Implementation projects will need to wait for the
establishment of the regulatory system for JI. But this uncertainty
may be mitigated where Host Countries will operate
under first-track JI provisions.
All CFB Methodologies
The following methodologies have been submitted to the CDM Executive Board and can be located on the UNFCCC website.
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