1Global Climate Change Alliance: Intra-ACP Programme Training Module Climate Change FinanceModule 4 – Introduction to the Clean Development Mechanism (CDM)Ms Isabelle Mamaty Senior Expert Climate Support Facility
2Module Structure CDM background and concept Additionality and baseline scenarioCDM project design document (PDD)CDM challenges in developing countries
3What 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
4Kyoto Protocol (1)Annex I (Developed Countries) agreed to reduce their GHGs by 5.2 % below 1990 levels in 1st commitment period 2008 – 2012Kyoto 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
5KYOTO 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.
6CDM objectivesArticle 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.
7CDM PrinciplesDeveloped 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 countryGHG reductions mustcreate 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 BoardFunding of CDM projects should be distinct from ODA
8CDM rationaleProvides 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.
9CDM Participation Requirements Voluntary participation from host countriesParticipating non-Annex I (developing) countries mustRatify the Kyoto ProtocolDesignate a National Authority (DNA) responsible for approving CDM projectsParticipating Annex I (developed) countries mustratify the Kyoto ProtocolDesignate a National Authority (DNA)Establish national inventory & registryDemonstrate a strong reporting capacityTypical steps for operationalizing DNAClarify 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 tradeAlign national CDM strategy with sustainable development priorities ( criteria, other policy)Obtain financial and non-financial resourcesDeploy appropriate human resources with an identified capacity development programme
10DNA FunctionsTo issue Letter of Approval for a CDM project activity stating that the participation is voluntaryTo confirm that the project activity contributes to the sustainable development objectives of the host countryTo provide a point of contact concerning national CDM policies & proceduresTo facilitate the development of a portfolio of CDM projects and promoting investmentTo act as a “one stop shop” for CDM in the Host Country
11Institutional Framework of a CDM process Project participant 1: Developing Country, Project developerProject participant 2: Annex 1 Country: Investor, BuyerNational Approval: Designated National Authority (DNA)Designated Operational Entity (DOE I): verifies that project meet all CDM requirementsDesignated Operational Entity (DOE II): certifies emission reductions once the project is operationalCDM Executive Board (EB): issues CERs
12DOE FunctionsA 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).
13How does CDM work ? Host Party (non-Annex I) with no an emission cap Specific project in host countrySpecific project in a host countryNon- Annex I Parties with benefit from projects activities resulting in CERsAnnex I PartyBaseline scenarioProject scenarioAcquired CERs are added to emission capCERsA total emission capof an Annex I PartySource:
14CDM projects by scopeDomination of energy projects: Energy industries (renewable/ non renewable sources): 66%Followed by:Waste handling and disposal: 14,70Manufacturing 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
15CDM 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 activityAdditionality 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.
16CDM 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.
17CDM Concept: Baseline (1) The baseline for a CDM project activityis the scenario that reasonably represents the anthropogenic emissions by sources of greenhouse gases that would occur in the absence of the proposed project activityThus, 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
18CDM Concept: Baseline (2) The baseline can be used to determine:whether a CDM project activity is additional; andthe 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
19CDM 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; ordeveloped in accordance with the rules for developing new methodologies and then approved by the Executive Board.
20CDM concept: Baseline (4) How to Establish a BaselineUsing approved methodologies (if not available, a new methodology has to be developed)In a transparent, conservative and justifiable mannerOn a project-specific basisUsing simplified procedures for small-scale projectsTaking account of national and/or sectoral policies
21CDM Concepts: Emission reduction principle GHG EmissionsTimeProject EmissionsBaseline EmissionsEmissions reductionThe difference between the actual project emissions and the emission baseline constitute the volume of CERsBaseline : 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.
22CDM 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.
23CDM concept: crediting period (2) There are two options for the length of a crediting period: fixed crediting period or renewable crediting periodFixed 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 activityRenewable 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 BoardThe starting date and length of the first crediting period has to be determined before registration.
24Estimated Timeline of a CDM project 6 to 12 months4 monthsCrediting period of the projectProject developerDNADOECDM Executive BoardStep 1- Project feasibility assessment /PINStep 2-CDM project development /PDDStep 3-Host approval /letter of approvalStep 4- Project validationStep 5- Project registrationStep 8-CER issuanceStep 7-Project verification/certification/ reportStep 6-Implementation and Monitoring /monitoring report
25CDM PDD preparationKey document involved in the validation and registration of a CDM project activity: information on the essential technical and organisational aspects of the project activityOne of the three documents required for a CDM project to be registered, along with the validation report and the letter of approvalSpecific 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)
26CDM 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
27CDM PDD preparation: Programmes of Activities (PoA) Programme Level Programmatic CDM (PoA)One Coordinating/managing Entity (CME) - who coordinates/manages the PoAPoA provides a Framework to implement CPAsActivity Level (PoA) Individual CDM Programme Activity (CPA)Implementing Partners carry on individual CPAsAchieves GHG reductions or removals by sinks using methodologiesCPACPACPACPA
28CDM 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 participantsA 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 atBudling form available at :If a bundle contains small-scale project activities of:the same type, same category and different technologies/measures; orthe same type, different categories and different technologies/measures; or different types, separate PDDs are required.
29CDM PDD preparation: types of CDM projects Single ProjectBundle of projectsProgramSingle locationMany locationsMany locations across countriesSingle project owner (e.g., 1 hrydo plant)Many project owners (e.g., 10 hydro plant)Many project owners1 project onlyA number of activities submitted as 1 project (e.g., 10 hydro plants)A number of activities submitted over the duration of a programA single crediting period (e.g., 7/10 years)Single crediting period for all activities (7/10 y)Each project has its own crediting periodProject owner is knownAll project owners are knownAt least one project owner is known, rest included as they join
30CDM 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 methodologySection C - Duration of the project / crediting periodSection D - Environmental impactsSection E - Stakeholder commentsAttachments to the CDM PDD:Annex I - Contact information on participants in the project activityAnnex 2 - Information on public fundingAnnex 3 - Baseline informationAnnex 4 - Monitoring information
31CDM-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 planAn approved methodology contains information on:Source, ApproachApplicabilitySummaryIdentification of baseline scenarioAdditionalityProject boundaryEmission reduction formulasLeakageMonitoring methodology
32CDM PDD preparation: What is a baseline approved methodology? Extensive elaborations on:FormulasDefinition of project boundariesMonitoring requirementsLeakageCompulsory to useProject type specificApproval by the Executive Board neededDifferent sets for large scale and small scale projects
33PDD 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 yearA Small-Scale CDM project is defined as:Type 1: Renewable energy systems with15MW (electrical) capacityType 2: Energy Efficiency projects with a saving of 60 GWh per yearType 3 : Any other project reducing 60 Kilo tonnes CO2 per yearAny CDM project activity not possessing the abovementioned characteristics is considered a large-scale CDM project activity.
34Where does a baseline approved methodology comes from ? There are more than 100 methodologiesLarge scale CDM methodologies are proposed by a CDM project developer using an approved new methodology template and approved by the CDM EBSmall scale methodologies are mainly directly drafted by the small‐scale working group and approved by the CDM EB
35Availability of baseline approved Methodology Ideally there would be an existing methodology approved by Executive Board (EB) applicable directly to the proposed projectCDM EB has provision for suggesting a new methodology or modification in an existing methodologyAs far as possible, use existing methodology to avoid complexity and time overrun
36PDD preparation – Monitoring plan Monitoring plan should include, the following information related to the project boundary during the crediting periodcollection and archiving of all relevant data necessary for estimating or measuring anthropogenic emissions by sources of GESThe 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
37CDM Project Cycle – Indicative Timelines and Costs Project completionPreparation and reviewof the Project: carbon risk assessmentand documentation: $40 K3 monthsUp to 21 years2 months1-3 yearsProject Appraisal and NegotiationCDM ProcessesBaseline: $20KMonitoring Plan: $20KPeriodic verification & certification Verification: 15$-30KValidation processContract, processing and documentation: $30KNumber of CDM projects registered : Number registered 3192 (on 22nd June 2011)Main criticism: Delay in registration (3 years average) (WB 2010)Construction and startInitial verification at start-up : $25KSource: World BankFull transaction cost for1 time 10 years CER period: 165,000 USD3 times 7 years CER period: 195,000 USD
38CDM 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 cycleNumber of CDM projects registered : Number registered 3192 (on 22nd June 2011)Main criticism: Delay in registration (3 years average) (WB 2010)
39CDM: 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.
40CDM: Sources of funding to support CDM process World Bank – Carbon FundPreparation of projects and programmes for reducing emissions and credits trading . Contact: Richard H. Zechter, Lead Carbon Finance SpecialistInternational Finance Corporation Climate FinanceUNDP Millennium Development Goals Carbon FacilityAssistance for the design of mitigation projets and preparation of MDP application …www.mdgcarbonfacility.orgEuropean Investment Bank Post-2012 Carbon Credit FundTrading of CERs and VERsAfrican Carbon Asset DevelopmentSupport to the preparation of MDP applicationacadfacility.orgForest Carbon Partnership FacilitySupport to forest conservation ( Ghana, Nigeria and Cote d’Ivoire).Climate Technology Initiative (CTI) Private Financing Advisory NetworkNGO providing technical assistance for elaboration of MDP and mitigation projects
42Discussion Questions and answers Discussion and sharing of experiences concerning the development of CDM projectHave 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?
43Where to get the information? Getting information : visit of the CDM website:
44Case studiesPresentation of different steps of a CDM PDD document preparation based on a concrete case study of project with emphasis on : Additionality – baseline concept
45Thank youContact: Dr. Pendo MARO, ACP Secretariat or