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Key elements of CDM-PDD and CDM-NMB _ Additionality Tool

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					AIT
 Key elements of CDM-PDD and CDM-
       NMB & Additionality Tool


                   Sudhir Sharma
      Asian Institute of Technology, Thailand

                   4 April 2005
AIT
                  Presentation Structure

  Key elements of Baseline Methodology
  CDM – New Methodology: Baseline (NMB)
  CDM – Project Design Document (PDD)
  Additionality Tool




      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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             Some Relevant Documents

  http://cdm.unfccc.int/Reference/Documents
    – Guidelines for Completion of the Project Design Document
      (CDM-PDD), The Proposed New Methodology: Baseline
      (CDM-NMB), and The Proposed New Methodology:
      Monitoring (CDM-NMM).
    – Guidelines for completing CDM-AR-PDD, CDM-AR-NMB and
      CDM-AR-NMM (AR – Afforestation and Reforestation).
  http://cdm.unfccc.int/Reference/Guidclarif
    – Guidance on CDM
        * Documents are regularly updated as new
           decisions/information become available.


      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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     Key elements of Baseline Methodology
    Basis for determining baseline scenario
     – An explanation how Baseline Scenario is chosen
         • Incorporating national/sectoral policies, programs etc.
     – Demonstrate that “ project activity is not the baseline scenario” –
       additionality test.
    Estimating Baseline
     – Formulae/algorithm for estimating baseline emissions.
         • Project Boundary.
         • Types of variables used.
         • Temporal (vintage) and spatial scope of data.
    Also includes
     – Basis of assessing leakage and leakage formulae/algorithm.
     – Formulae/algorithm for project emissions.
    Data sources and assumptions
     – Data: spatial scope and vintage
     – How the data is obtained (requirement and sources)?
                BM should describe all the above aspects

        4th Regional Workshop and Training on Capacity Development for the CDM
                          April 4-5 , 2005, AITCC, AIT, Thailand
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  Key informational elements of CDM-NMB

  Overall structure of the CDM-NMB to highlight key
     informational elements
    Briefly discuss the most observed comments made
     on the Methodology




       4th Regional Workshop and Training on Capacity Development for the CDM
                         April 4-5 , 2005, AITCC, AIT, Thailand
AIT                      CDM – NMB: Contents (1)
 A. Identification of methodology
    i.      Title
    ii.     List of project category to which applicable
    iii.    Applicability conditions
    iv.     Potential strengths/weakness
 B. Overall summary description
 C. Choice and justification of baseline approach
    i. Approach chosen
    ii. Justification of the approach chosen




           4th Regional Workshop and Training on Capacity Development for the CDM
                             April 4-5 , 2005, AITCC, AIT, Thailand
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                 CDM – NMB: Contents (2)
 D. Explanation and justification of the proposed new
    baseline methodology
    i.     Explanation of how baseline scenario is determined.
    ii.    Demonstration of additionality.
    iii.   How national/sectoral policies are taken into account.
    iv.    Project Boundary.
    v.     Formulae for Baseline emissions
    vi.    Formulae for Project emissions
    vii.   Leakage.
           Main section where the components of Baseline
                        Methodology are defined.


       4th Regional Workshop and Training on Capacity Development for the CDM
                         April 4-5 , 2005, AITCC, AIT, Thailand
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               CDM – NMB: Contents (3)

 E. Data sources and assumptions
    i. Describe parameters and assumptions
    ii. List of data used and sources.
    iii. Vintage of Data
    iv. Spatial level of Data.
    Tabulation helps in presentation. Also it helps check whether all the
                       variables have been defined clearly.
 F. Assessment of uncertainties
 G. Explanation of how the baseline methodology was
    developed in a transparent and conservative manner


      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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            Identifying Baseline Scenario
D    Survey of activities providing similar services as the Project
E
F
I           Define Spatial Scope – local/regional/national
N
E     Map tech/practices for Project Activity in Spatial Boundary


         Identify policies/regulations that influence choice of
 R
                          Technology/practices
 E
 F
 I     Identify programs for promoting resource conservation
 N                Technology/practices in the sector
 E
              Drop/Add alternatives to Baseline Scenarios


              SELECT BASELINE SCENARIO: Baseline Approach

       4th Regional Workshop and Training on Capacity Development for the CDM
                         April 4-5 , 2005, AITCC, AIT, Thailand
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                      Baseline Approach

    The three Baseline Approaches:
     a. Emissions actual or historical.
     b. Emissions of most economic options.
     c. Weighted average of similar projects.
    Choose one and only one of the three approaches
    Justified choice on the following basis (Annex 1,
     Report EB10)
     – Consistent with the context of applicable project types.
     – Consistent with underlying algorithms and data sources
        used in baseline methodology.
     – One that most closely reflects the process used for
        calculating baseline emissions.
      Tool of additionality does not need to be linked to Approach.

       4th Regional Workshop and Training on Capacity Development for the CDM
                         April 4-5 , 2005, AITCC, AIT, Thailand
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                     Baseline Approach

  Guidance on Approach C.
   – If choosing C – should define
            – How is “similar social, economic, environmental, and technological
              circumstances” are defined.
            – How is “performance among the top 20 per cent of category” {defined
              as GHG emission per unit output} assessed.
   – Baseline emissions is
            – Output weighted average emissions of the top 20 per cent of similar
              project activities undertaken in the previous five years; or
            – Output-weighted average emissions of similar project activities
              undertaken in previous five years that are also in the top 20 per cent of
              all current operating projects; which ever results in conservative
              estimate




      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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         Evaluating BM using CDM-NMB




      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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               Evaluating BM: relevance

  Applicability of BM
    – Conditions under which BM is applicable to a proposed
      projects.
    – Includes all the assumptions made. e,g. – Say assumption
      of “no law to capture methane from SLF” was made in
      identifying baseline scenario. The BM is applicable where
      ever this condition is fulfilled.
    – Helps check if methodology developed is suitable for
      proposed CDM project.
  Strength and weakness
    – Evaluation of methodology vis-à-vis the existing approved
      methodologies.


      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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               Evaluating BM: robustness
    Transparency – Replicable based on CDM-PDD and CDM-NMB
     by reviewers
     – Clear statement of assumptions
         • Made in arriving at baseline scenario
         • Choosing values/data for variables/parameters
     – References for all the information used in developing methodology
       and its application in CDM-PDD
    Conservativeness
     – Choice of assumptions and data for variables/parameters result in
       lower baseline emissions.
     – Choice of assumptions and data for variables/parameters for
       economic analysis result in optimistic outcome.
    Assessment of uncertainty in baseline scenario
     – Related to assumption (e.g., certain policy is in place but is not
       implemented stringently)
     – Related to variables used in baseline emission estimation

        4th Regional Workshop and Training on Capacity Development for the CDM
                          April 4-5 , 2005, AITCC, AIT, Thailand
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 Key informational elements of CDM-PDD




      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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          CDM: Project Design Document

 A.    General description of project activity
 B.    Application of Baseline methodology
 C.    Duration of the project activity / Crediting period
 D.    Application of Monitoring Methodology and Plan.
 E.    Estimation of GHG emissions by sources
 F.    Environmental impacts        Need not be filled at
 G.    Stakeholder’s comments submission of NBM
      Annexes
 Annex I: Contact Information on Participations in the Project
     activities
 Annex 2: Information regarding Public Funding
 Annex 3: Baseline Information
 Annex 4: Monitoring Plan

        4th Regional Workshop and Training on Capacity Development for the CDM
                          April 4-5 , 2005, AITCC, AIT, Thailand
AIT General description of project activity
   Description should cover
     – Main purpose of the project activity and its contribution to
       SD
     – Details of project activity – activity level, technology used,
       environmental features of technology, process details, etc.
     – Brief description of additionality of project - A description of
       national/sectoral context, relevant policies and implications,
       sectoral practices, etc.
   A&R projects
     – Eligibility of activity – eligibility conditions
     – Carbons pools accounted for




       4th Regional Workshop and Training on Capacity Development for the CDM
                         April 4-5 , 2005, AITCC, AIT, Thailand
AIT            B: Baseline methodology

 Describe outcome of application of methodology to Project
 B.1 Title and reference of the methodology applied to
   the project activity.
 B.1.1. Applicability of methodology to project.
 B.2 Description of how the methodology is applied
    – Report key information and data used in determining baseline
      scenario (table form).
 B.3 Additionality demonstration
 B.4 Project Boundary




      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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   E.        Estimation of GHG emissions by sources
 E.1 Estimation of GHG emissions by sources
    – From project activity and within the project boundary.
 E.2 Estimated Leakage
 E.3 Project activity emissions = E1 + E2
 E.4 Baseline emissions
 E.5 Emissions reduction = E4 – E3
  Information to be presented
    –   Formulae
    –   Data used
    –   Emissions in CO2 equivalent
    –   Estimation of each year of credit period
                  Even if baseline calculated ex-post,
           ex-ante estimates of baseline should be reported.



        4th Regional Workshop and Training on Capacity Development for the CDM
                          April 4-5 , 2005, AITCC, AIT, Thailand
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                                  Conclusions
  Important points to remember
     – NMB – description of the steps/procedure/formulae of a
       baseline methodology.
     – PDD – report application of baseline methodology to the
       specific project – submitted as demonstration of the
       methodology (Annex 3, EB09 Report).

 Methodology for estimating area of given      Application of Methodology
       3-D object with six faces:
                                               (i) l = 10 cm; w = 10 cm; h = 10 cm
 (i) Measure, length (l), width (w) and
                                               (ii) Identify Shape
       height (h)
                                                      (i) If l = w = h = 10 cm » cube
 (ii) Identify the shape of object: the rule
                                               (iii) Calculate area
        a. If l = w = h: cube
                                                      (i) Since cube V = l3 = 1000 CCM
        b. Else cuboids
 (iii) Calculate area
        a) If cube V = l3
        b) If cuboids V = l*w*h


         4th Regional Workshop and Training on Capacity Development for the CDM
                           April 4-5 , 2005, AITCC, AIT, Thailand
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                      Additionality Tool




      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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                            Additionality
  Marrakech Accord                              Environment Additionality
   – “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”.
  EB09 Report, Annex 3, Para 2
   – “a proposed new methodology shall explain how a project
     activity ….can demonstrate that it is additional i.e. is different
     from the baseline scenario”
  Cop 10 – guidance to CDM
   – “Recalls that, as indicated by the Executive Board, the use of
     the “Tool for the demonstration and assessment of additionality”
     is not mandatory for project participants”



      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
AIT                       STEP 0: Claiming credits for project with start date prior
                        to date of registration – if not applicable go to step 1 directly


                                       CDM consideration proved: Pass


            STEP 1: Identification of alternatives consistent with current laws and regulations
                 - If proposed CDM project only alternative left: NON-ADDITIONAL (NA)


                                       More than one alternative: Pass

                                                                                    STEP 3: Barrier Analysis
 STEP 2: Investment Analysis              CDM financially attractive                   No barriers: NA


  CDM financially not attractive                                                       CDM faces Barriers




                            STEP 4: Common Practice Analysis – credibility check
                    - If similar activity observed with no essential difference: Project NA


               No similar activity or similar activities present but difference in circumstances



                                     STEP 5: Impact of CDM registration
                               - If CDM benefits have no impact: Project NA


         4th Regional Workshop and Training on Capacity Development for the CDM
                           April 4-5 , 2005, AITCC, AIT, Thailand
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                                    Step 0
  If the crediting period starting prior to the registration of
   project activity,
    – only if CDM project activity
        • The starting date between 1 January 2000 and 18th January
          2005
        • submitted for registration before 31 December 2005
    – Provide evidence that the incentive from the CDM was seriously
      considered in the decision to proceed with the project activity.
        • This evidence shall be based on (preferably official, legal
          and/or other corporate) documentation that was available to
          third parties at or prior to the start of the project activity.




       4th Regional Workshop and Training on Capacity Development for the CDM
                         April 4-5 , 2005, AITCC, AIT, Thailand
AIT         Step 1: Identifying Alternatives
    Define alternatives including:
      – alternatives available to the project participants or similar project
        developers that provide outputs or services comparable with the
        proposed CDM project activity.
      – The proposed project activity
      – If applicable, continuation of the current situation
    compliance with all applicable legal and regulatory requirements,
      – GHG laws, environment laws, investment laws, etc.
      – National and local policies that do not have legally-binding status not
        considered except
          • National/sectoral policies regulation that give comparative
            advantages to more emissions intensive options, implemented before 11
            December 1997.
    If not in Compliance, then show that,
      – applicable legal or regulatory requirements are systematically not
        enforced and that noncompliance is widespread in the country.
      – If this cannot be shown, then eliminate the alternative from further
        consideration;
     This is Similar to Identifying alternative Baseline Scenario step in
                          selection of Baseline scenario.
        4th Regional Workshop and Training on Capacity Development for the CDM
                          April 4-5 , 2005, AITCC, AIT, Thailand
AIT              Step 2: Investment Analysis
                  Any financial returns from project
                    Other than the CER benefits?


                      No                                   Yes

                                 Investment comparison
Use simple cost analysis                                                  Benchmark Analysis
                                         Analysis
Demonstrate costs and                                                  Choose: IRR2, NPV, CB ratio
                               Choose: IRR1, NPV, CB ratio
prove no benefits accrue                                              Or unit cost of service ($/kWh)
                              Or unit cost of service ($/kWh)

                                                                          Choose Benchmark:
                                                                        GBR + Risk Premium, or
                                                                   Cost of Cap or Req. return Rate, or
                                                                     Company internal Benchmark

                                 Indicator of atleast                      Indicator of CDM
                            One Alternative > CDM Project                Project < Benchmark

                                         Sensitivity Analysis

          1: Project or Equity IRR; 2: Project IRR, Equity IRR only if one Project Promoter

           4th Regional Workshop and Training on Capacity Development for the CDM
                             April 4-5 , 2005, AITCC, AIT, Thailand
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      Financial analysis: some definitions
  Net Present Value =                     CapCost 
                                                                 Net Re vi
                                                         (1  rd )      i
                                                        i 1,T




    Internal Rate of Return, s.t.  CapCost  
                                                                          Net Re vi
                                                                   i 1,T (1  irr)
                                                                                    i
                                                                                      0


                                                PVCost
  Cost Benefit Ratio =                         PVBenefit




       4th Regional Workshop and Training on Capacity Development for the CDM
                         April 4-5 , 2005, AITCC, AIT, Thailand
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    Financial analysis: some definitions

  Unit cost of service: Levelized life-cycle cost
    – First calculate PV: The annual costs of project development,
      operation and decommissioning for each year over the
      economic life of the project. The resulting series of annual
      cash flows were discounted by a discount rate, then
      summed to a net present value.
    – Convert to annuity: Convert PV into a uniform series of
      annual cash flows using the same discount rate.
    – Estimated levelized cost: Divide the uniform annual cash
      flow by the estimated annual production.




      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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             Step 2: Investment analysis

  Government Bond – of appropriate maturity –
     source: government treasury
    Risk premium
     – Equity market risk premium: equity research/market
       analysis groups – most appropriate for Equity IRR
     – Premium on loans for sector or project types – banking and
       financial institutions.
  Required rate of return – Lending banks/financial
     institutes
    Weighted average cost of capital – company specific


       4th Regional Workshop and Training on Capacity Development for the CDM
                         April 4-5 , 2005, AITCC, AIT, Thailand
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             Step 2: Investment analysis

  Sensitivity analysis: Factors in investment analysis
    – Fixed
       •   Investment cost, debt-equity ratio, risk premiums, etc.
       •   Terms of loan (interest rate, payment schedule, etc)
       •   Capital subsidy, interest subsidy, sales tax or other tax breaks, etc.
       •   Depreciation, tax laws,
       •   Salvage value of equipment
    – Variables
       • Inputs costs, maintenance and operation costs, etc.
       • Revenue streams – price of outputs, output, etc.
       • Discount Rate – for NPV calculations – subjective value based on
         cost of money and risk perceptions.
       • These values should be varied to check robustness of estimates
       • Present the range of values that the variables can take – good
         practice.
      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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                 Step3: Barrier Analysis

  Determine whether the proposed project activity faces
   barriers that:
    – (a) Prevent the implementation of this type of proposed project
      activity; and
    – (b) Do not prevent the implementation of at least one of the
      alternatives.
                 Not enough to just identify barriers to project
  Investment barriers (other than the economic/financial
   barriers in Step 2 above)
    – Debt funding is not available for this type of innovative project
      activities.
    – No access to international capital markets due to real or
      perceived risks

      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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                 Step 3:Barrier Analysis
  Technological barriers
    – Skilled and/or properly trained labor not available
    – no education/training institution to provide the needed skill
    – Lack of infrastructure to supply spare parts
  Risk perception
    – Lack of familiarity due to lack sufficient commercial
      demonstration.
    – Lack of risk sharing mechanism from vendors
    – Market conditions in the sector
  Information
    – availability of sufficient and good quality information to
      make informed decision.
       Documentary proof – existing studies, studies undertaken by
       promoters while making decision, written expert judgment, etc.
      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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         Step 4: Common Practice Analysis

  Analysis of any other activities implemented previously
     or currently underway similar to the proposed project
     activity.
    Projects are considered similar if
     –   In the same country/region
     –   Rely on a broadly similar technology,
     –   Are of a similar scale,
     –   and take place in a comparable environment ( regulatory
         framework, investment climate, access to technology, access to
         financing, etc.)
                 DO NOT INCLUDE Other CDM project activities
  DEMONSTRATE THE DIFFERENCES
         4th Regional Workshop and Training on Capacity Development for the CDM
                           April 4-5 , 2005, AITCC, AIT, Thailand
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     Step 4: Common Practice Analysis

  E.g – Grid connected Wind Project in India
    – Existing capacity already 1200 MW.
    – Difference could be based on
       • Most capacity in one or two states
       • Initial projects were captive power projects – the avoided cost
         higher than the price distributor pays.
       • Financial incentives available to projects have decreased – capital
         subsidy, sales tax benefits, accelerated depreciation benefit.




      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand
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                       Step 5: CDM Impact

    How CDM Benefits help overcome the economic and financial
     hurdles (Step 2) or other identified barriers (Step 3), e.g,
     – CER benefits increase the IRR above threshold
     – CER revenues enables access to Debt funding which lowers the overall
       cost of funds for implementing the project.
     – Foreign participant with technology experience as partner and guarantor
       of performance due to CER benefit.
         • CER procured by foreign funder to meets its own requirement and,
           hence, its willingness to participate.
         • Helps access dollar loan to fund technology procurement.
         • Provides technical training for staff for operation and management.
     – Foreign participant has access to cheaper capital through decreased
       exchange rate risk due its participation.
      Key: List how CER/ CDM benefit helps address investment
       analysis (in step 2) and barriers listed (in step 3) for project.

        4th Regional Workshop and Training on Capacity Development for the CDM
                          April 4-5 , 2005, AITCC, AIT, Thailand
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      4th Regional Workshop and Training on Capacity Development for the CDM
                        April 4-5 , 2005, AITCC, AIT, Thailand

				
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