1. Global Climate Change Alliance: Intra-ACP Programme
Training Module Climate Change Finance
Module 4 – Introduction to the Clean Development Mechanism (CDM)
Ms Isabelle Mamaty Senior Expert Climate Support Facility

2. Module Structure CDM background and concept
Additionality and baseline scenario
CDM project design document (PDD)
CDM challenges in developing countries

3. What is the Clean Development Mechanism (CDM)?
Kyoto Protocol (1997):
“The Common but Differentiated Responsibilities principle”
Entered into force February 2005.
Binding GHG emission reduction targets for Annex I countries (developed countries and economies in transition):
5% below 1990 levels by (First compliance period).
Reductions in emissions of 6 Greenhouse Gases, measured in CO2 equivalence.
Compliance by Annex I countries:
Domestic emission reduction through policies and measures.
Flexibility mechanisms

4. Kyoto Protocol (1)
Annex I (Developed Countries) agreed to reduce their GHGs by 5.2 % below 1990 levels in 1st commitment period 2008 – 2012
Kyoto Protocol is a legally binding agreement for emissions reductions by industrialised countries through three market-based mechanisms:
Emissions trading “carbon market”
Clean development mechanism (CDM)
Joint implementation (JI)
184 Parties of the Convention have ratified its Protocol to date.
The Kyoto Protocol is a legally binding agreement under which signatories (industrialised) countries will reduce their collective emissions of greenhouse gases by 5.2 per cent on average over the five-year period of compared to the level in 1990 (reduction of 8% for the EU member States; 7% for United States; and 6% for Japan) via the implementation of national strategies.
Emission trading (Art. 17 of Kyoto Protocol): Parties under Kyoto Protocol (Annex B Parties) have committed targets for limiting or reducing CO2 expressed as levels of allowed emissions or « assigned » amounts over period. The allowed emissions are expressed as « assigned amount units » (AAUs) which can be traded by parties that have not used them to parties that are over their targets.
Other traded units under Kyoto are :
A removal unit (RMU) on the basis of land use, land-use change and forestry (LULUCF) activities such as reforestation
 An emission reduction unit (ERU) generated by a joint implementation project (article 6 of the Kyoto Protocol) :
a country of Annex B party to Kyoto Protocol is allowed to earn emission reduction (ERUs) from an emission –reduction or emission removal project in another Annex B Party.
A certified emission reduction (CER) generated from a clean development mechanism project activity (article 12 of Kyoto Protocol). A annex B country Party to Kyoto Protocol is allowed to earn saleable CER from an emission-project in developing countries.
Transfers and acquisitions of these units are compiled in the registry systems under the Kyoto Protocol

5. KYOTO Protocol CDM mechanism
Annex 1 countries invest in GHG reduction projects in non-Annex 1 countries and receive Certified Emission Reductions (CERs) to fulfil their binding commitments.

6. CDM objectives
Article 12 of the Kyoto Protocol has two main objectives:
1. Assist host countries (non-Annex 1) achieve sustainable development.
2. Provide flexibility to Annex-1 investors in reducing their emissions.

7. CDM Principles
Developed countries (Annex 1) with binding emission caps assist developing countries with no emission limits in developing activities/projects for GHG reduction.
The project/activity must contribute to sustainable development in the host country
GHG reductions must
create real, measurable and long- term benefits to climate change mitigation.
be additional to any reductions that would occur in the absence of the proposed project/activity.
A scenario that represents what would have happened in the absence of the proposed project /activity should be developed (Baseline scenario)
The baseline is derived using a methodology approved by the CDM Executive Board
Funding of CDM projects should be distinct from ODA

8. CDM rationale
Provides market-oriented means to promote sustainable development (SD) while reducing GHG emissions below what they would have otherwise been.
Promotes private sector investment in SD (distinct from ODA).
Provides a ”bottom–up’ approach regarding project development.
Involves public scrutiny.

9. CDM Participation Requirements
Voluntary participation from host countries
Participating non-Annex I (developing) countries must
Ratify the Kyoto Protocol
Designate a National Authority (DNA) responsible for approving CDM projects
Participating Annex I (developed) countries must
ratify the Kyoto Protocol
Designate a National Authority (DNA)
Establish national inventory & registry
Demonstrate a strong reporting capacity
Typical steps for operationalizing DNA
Clarify mission and objectives (roles & responsibilities)
Obtain official status (e.g. through legislature, presidential or ministerial decision/decree)
Enhance national legal framework for DNA decisions and regulating carbon trade
Align national CDM strategy with sustainable development priorities ( criteria, other policy)
Obtain financial and non-financial resources
Deploy appropriate human resources with an identified capacity development programme

10. DNA Functions
To issue Letter of Approval for a CDM project activity stating that the participation is voluntary
To confirm that the project activity contributes to the sustainable development objectives of the host country
To provide a point of contact concerning national CDM policies & procedures
To facilitate the development of a portfolio of CDM projects and promoting investment
To act as a “one stop shop” for CDM in the Host Country

11. Institutional Framework of a CDM process
Project participant 1: Developing Country, Project developer
Project participant 2: Annex 1 Country: Investor, Buyer
National Approval: Designated National Authority (DNA)
Designated Operational Entity (DOE I): verifies that project meet all CDM requirements
Designated Operational Entity (DOE II): certifies emission reductions once the project is operational
CDM Executive Board (EB): issues CERs

12. DOE Functions
A designated operational entity (DOE) is an entity designated by the COP/MOP, based on the recommendation by the Executive Board, as qualified to validate proposed CDM project activities as well as verify and certify reductions in anthropogenic emissions by sources of greenhouse gases (GHG).
A designated operational entity shall perform validation or verification and certification on the same CDM project activity. Upon request, the Executive Board may however allow a single DOE to perform all these functions within a single CDM project activity.
Article 12(4) of the Kyoto Protocol establishes an Executive Board to supervise the CDM under the authority and guidance of the conference of the parties serving as the meeting of the Parties to the Kyoto Protocol (COP/MOP).

13. How does CDM work ? Host Party (non-Annex I) with no an emission cap
Specific project in host country
Specific project in a host country
Non- Annex I Parties with benefit from projects activities resulting in CERs
Annex I Party
Baseline scenario
Project scenario
Acquired CERs are added to emission cap
CERs
A total emission cap
of an Annex I Party
Source:

14. CDM projects by scope
Domination of energy projects: Energy industries (renewable/ non renewable sources): 66%
Followed by:
Waste handling and disposal: 14,70
Manufacturing industries: 4,75%
Fugitive emissions from fuels (solid, oil and gas): 4,4%%
Agriculture: 3,7% …..
Afforestation and reforestation: less than 1%
Source : UNFCC, 2011

15. CDM concept: Additionality (1)
As per CDM:
A [small-scale] 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 [small-scale] CDM project activity
Additionality is the requirement that the greenhouse gas emissions after implementation of a CDM project activity are lower than those that would have occurred in the most plausible alternative scenario to the implementation of the CDM project activity.

16. CDM project: Additionality (2)
This alternative scenario may be the business-as- usual case (that is, the continuation of current emission levels in the absence of the project activity), or it may be some other scenario which involves a gradual lowering of emissions intensity.
Additionality is a principle condition for the eligibility of any project under the CDM.
Additionality is a requirement for validation, and will be confirmed by the designated operational entity (DOE) as part of the validation report.

17. CDM Concept: Baseline (1)
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
Thus, a baseline for a CDM project activity is a hypothetical reference case, representing the volume of greenhouse gases that would have been emitted if the project were not implemented

18. CDM Concept: Baseline (2)
The baseline can be used to determine:
whether a CDM project activity is additional; and
the volume of additional greenhouse gas emission reductions achieved by a project activity.
Baselines must cover emissions from all gases, sectors and source categories listed in Annex A to the Kyoto Protocol that occur within the project boundary.
A baseline is deemed to be accurate if it is derived using an appropriate baseline methodology

19. CDM concept: Baseline (3)
A baseline is deemed to reasonably represent the most likely alternative scenario to project implementation if it is developed using a baseline methodology that is:
already approved by the Executive Board; or
developed in accordance with the rules for developing new methodologies and then approved by the Executive Board.

20. CDM concept: Baseline (4)
How to Establish a Baseline
Using approved methodologies (if not available, a new methodology has to be developed)
In a transparent, conservative and justifiable manner
On a project-specific basis
Using simplified procedures for small-scale projects
Taking account of national and/or sectoral policies

21. CDM Concepts: Emission reduction principle
GHG Emissions
Time
Project Emissions
Baseline Emissions
Emissions reduction
The difference between the actual project emissions and the emission baseline constitute the volume of CERs
Baseline : 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 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.
Additionnality : 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. Additionality should be addressed using the Additionality tool of the methodology.
CDM rules: PDD is the essential document demonstrating why the Project is proposed as a CDM project activity. Therefore, the relevant CDM rules will have to be abided by. For example it is required that all the information presented in the PDD should be Accurate, Conservative, Relevant, Credible, Reliable, and Complete according to the Clean Development Mechanism Validation and Verification Manual. Hereby, information should be checked and confirmed complying with CDM rules prior to the PDD writing.

22. CDM concept: crediting period (1)
The crediting period for a CDM project activity is the period for which reductions from the baseline are verified and certified by a designated operational entity for the purpose of issuance of certified emission reductions (CERs).
Project participants shall choose the starting date of a crediting period to be after the date the first emission reductions are generated by the CDM project activity. A crediting period shall not extend beyond the operational lifetime of the project activity.

23. CDM concept: crediting period (2)
There are two options for the length of a crediting period: fixed crediting period or renewable crediting period
Fixed crediting period:
the length and starting date of the period is determined once for a project activity with no possibility of renewal or extension once the project activity has been registered.
The length of the period can be a maximum of ten years for a proposed CDM project activity
Renewable crediting period:
A single crediting period may be of a maximum of seven years.
The crediting period may be renewed at most two times (maximum 21 years), through validation and endorsement process by respectively a designated operational entity and the Executive Board
The starting date and length of the first crediting period has to be determined before registration.

24. Estimated Timeline of a CDM project
6 to 12 months
4 months
Crediting period of the project
Project developer
DNA
DOE
CDM Executive Board
Step 1- Project feasibility assessment /PIN
Step 2-CDM project development /PDD
Step 3-Host approval /letter of approval
Step 4- Project validation
Step 5- Project registration
Step 8-CER issuance
Step 7-Project verification/certification/ report
Step 6-Implementation and Monitoring /monitoring report

25. CDM PDD preparation
Key document involved in the validation and registration of a CDM project activity: information on the essential technical and organisational aspects of the project activity
One of the three documents required for a CDM project to be registered, along with the validation report and the letter of approval
Specific PDDs exist for different project types:
Large-scale project activities (CDM-PDD)
Small-scale project activities (CDM-SSC-PDD)
Afforestation and reforestation project activities (CDM- AR-PDD)
Small-scale afforestation and reforestation project activities (CDM-SSC-AR-PDD)
Programmes of Activities (CDM-POA-DD) and CDM Programme Activities (CDM-CPA-DD)

26. CDM PDD preparation: Programmes of Activities (PoA)
A voluntary coordinated action by a private or public entity which coordinates and implements any policy/measure or stated goal (i.e. incentive schemes and voluntary programmes), which leads to anthropogenic GHG emission reductions or net anthropogenic greenhouse gas removals by sinks that are additional to any that would occur in the absence of the PoA, via an unlimited number of CDM programme activities (CPAs).
CDM Project Activity (CPA) is defined as Project Activity that actually generates CER Individually unique and identifiable with a clear, defined boundary

27. CDM PDD preparation: Programmes of Activities (PoA)
Programme Level Programmatic CDM (PoA)
One Coordinating/managing Entity (CME) - who coordinates/manages the PoA
PoA provides a Framework to implement CPAs
Activity Level (PoA) Individual CDM Programme Activity (CPA)
Implementing Partners carry on individual CPAs
Achieves GHG reductions or removals by sinks using methodologies
CPA
CPA
CPA
CPA

28. CDM PDD preparation: Bundling of small projects
Bundling of small projects is “bringing together of several small-scale CDM project activities, to form a single CDM project activity or portfolio without the loss of distinctive characteristics of each project activity »(Executive Board Report Annex 21, Annex 21, paragraph 3)
Bundled projects can obtain a single validation report and a single certification report for the entire bundle, which streamlines these processes for project participants
A form with information related to the bundle (F-CDM-BUNDLE) should be completed in addition to the PDD document(s)
Source : UNFCC, Executive Board report Annex 21, available at
Budling form available at :
If a bundle contains small-scale project activities of:
the same type, same category and different technologies/measures; or
the same type, different categories and different technologies/measures; or different types, separate PDDs are required.

29. CDM PDD preparation: types of CDM projects
Single Project
Bundle of projects
Program
Single location
Many locations
Many locations across countries
Single project owner (e.g., 1 hrydo plant)
Many project owners (e.g., 10 hydro plant)
Many project owners
1 project only
A number of activities submitted as 1 project (e.g., 10 hydro plants)
A number of activities submitted over the duration of a program
A single crediting period (e.g., 7/10 years)
Single crediting period for all activities (7/10 y)
Each project has its own crediting period
Project owner is known
All project owners are known
At least one project owner is known, rest included as they join

30. CDM PDD preparation: PDD sample
The CDM PDD is divided into 5 sections:
Section A - General description of the project activity;
Section B - Application of a baseline and monitoring methodology
Section C - Duration of the project / crediting period
Section D - Environmental impacts
Section E - Stakeholder comments
Attachments to the CDM PDD:
Annex I - Contact information on participants in the project activity
Annex 2 - Information on public funding
Annex 3 - Baseline information
Annex 4 - Monitoring information

31. CDM-PDD preparation: Baseline Approved methodology
Definition: Methodologies are standardised procedures how to measure and calculate emission reductions in a CDM project. Each CDM methodology consists of two parts:
A baseline methodology, which is the emissions that would have been created in the most plausible alternative scenario to the implementation of the project activity (called the baseline scenario)
A monitoring methodology, which refers to the method used by project participants for the collection and archiving of all relevant data necessary for the implementation of the monitoring plan
An approved methodology contains information on:
Source, Approach
Applicability
Summary
Identification of baseline scenario
Additionality
Project boundary
Emission reduction formulas
Leakage
Monitoring methodology

32. CDM PDD preparation: What is a baseline approved methodology?
Extensive elaborations on:
Formulas
Definition of project boundaries
Monitoring requirements
Leakage
Compulsory to use
Project type specific
Approval by the Executive Board needed
Different sets for large scale and small scale projects

33. PDD preparation: CDM project types
Micro Scale Projects defined as the project activity is an off grid activity supplying energy to households/communities (less than 12 hrs grid availability per 24 hrs day is also considered as off grid for this assessment); and is located in a SIDS or an LDC and is either of the following types:
Type 1:Renewable Energy Project with 5 Megawatts electricity (or 15 MW thermal).
Type 2: Energy efficiency projects with 20 GWh savings per year.
Type 3: Any other project with 20 Kilo tonnes of CO2 reduction per year
A Small-Scale CDM project is defined as:
Type 1: Renewable energy systems with15MW (electrical) capacity
Type 2: Energy Efficiency projects with a saving of 60 GWh per year
Type 3 : Any other project reducing 60 Kilo tonnes CO2 per year
Any CDM project activity not possessing the abovementioned characteristics is considered a large-scale CDM project activity.

34. Where does a baseline approved methodology comes from ?
There are more than 100 methodologies
Large scale CDM methodologies are proposed by a CDM project developer using an approved new methodology template and approved by the CDM EB
Small scale methodologies are mainly directly drafted by the small‐scale working group and approved by the CDM EB

35. Availability of baseline approved Methodology
Ideally there would be an existing methodology approved by Executive Board (EB) applicable directly to the proposed project
CDM EB has provision for suggesting a new methodology or modification in an existing methodology
As far as possible, use existing methodology to avoid complexity and time overrun

36. PDD preparation – Monitoring plan
Monitoring plan should include, the following information related to the project boundary during the crediting period
collection and archiving of all relevant data necessary for estimating or measuring anthropogenic emissions by sources of GES
The collection and archiving of all relevant data necessary for determining the baseline of anthropogenic emissions by sources of GES;
The identification of all potential sources of, and the collection and archiving of data on, increased anthropogenic emissions by sources of GES outside the project boundary that are significant and reasonably attributable to the project activity;
Quality assurance and control procedures for the monitoring process;
Procedures for the periodic calculation of the reductions of anthropogenic emissions by sources by the proposed CDM project activity, and for leakage effects;
Documentation of all steps involved in the calculations

37. CDM Project Cycle – Indicative Timelines and Costs
Project completion
Preparation and review
of the Project: carbon risk assessment
and documentation: $40 K
3 months
Up to 21 years
2 months
1-3 years
Project Appraisal and Negotiation
CDM Processes
Baseline: $20K
Monitoring Plan: $20K
Periodic verification & certification Verification: 15$-30K
Validation process
Contract, processing and documentation: $30K
Number of CDM projects registered : Number registered 3192 (on 22nd June 2011)
Main criticism: Delay in registration (3 years average) (WB 2010)
Construction and start
Initial verification at start-up : $25K
Source: World Bank
Full transaction cost for
1 time 10 years CER period: 165,000 USD
3 times 7 years CER period: 195,000 USD

38. CDM project vs. Conventional project
A CDM project can be thought of as a conventional project with an additional CDM-specific component. The figure below compares the CDM project cycle with the conventional project cycle
Number of CDM projects registered : Number registered 3192 (on 22nd June 2011)
Main criticism: Delay in registration (3 years average) (WB 2010)

39. CDM: Challenges in developing countries
Lack of CDM projects in developing countries.
Dispersed nature of population: Small projects.
Low potential for GHG reduction hence low CER generation.
Investors not keen.
High transaction costs.
Lack of awareness, capacity (institutional, technical, regulatory).
DNAs not set-up in most developing countries.

40. CDM: Sources of funding to support CDM process
World Bank – Carbon Fund
Preparation of projects and programmes for reducing emissions and credits trading . Contact: Richard H. Zechter, Lead Carbon Finance Specialist
International Finance Corporation Climate Finance
UNDP Millennium Development Goals Carbon Facility
Assistance for the design of mitigation projets and preparation of MDP application …
European Investment Bank Post-2012 Carbon Credit Fund
Trading of CERs and VERs
African Carbon Asset Development
Support to the preparation of MDP application
acadfacility.org
Forest Carbon Partnership Facility
Support to forest conservation ( Ghana, Nigeria and Cote d’Ivoire).
Climate Technology Initiative (CTI) Private Financing Advisory Network
NGO providing technical assistance for elaboration of MDP and mitigation projects

41. Turning words into action

42. Discussion Questions and answers
Discussion and sharing of experiences concerning the development of CDM project
Have you ever developed a CDM project in your sector or at your level ? what are the institutional and capacity needs in your organisation to do so?

43. Where to get the information?
Getting information : visit of the CDM website:

44. Case studies
Presentation of different steps of a CDM PDD document preparation based on a concrete case study of project with emphasis on : Additionality – baseline concept

45. Thank you
Contact: Dr. Pendo MARO, ACP Secretariat or