1. 1st Sustainable Development Mechanisms Joint Coordination Workshop Significant Deficiencies in Validation, Verification and Certification Reports Risk and Liability associated with the Procedure, and Measures to address it DOE/AE Forum | Werner Betzenbichler | March 2012

2. What are the objectives behind this procedure? Compensation of over-issuance – integrity of the CDM - Shall DOEs compensate for every identified ton of excess issuance? - Or only, if it goes beyond the materiality thresholds? - Or only, if it is not caused by ambiguous regulations? - Or only, if it is caused by cases of fraudulence or professional negligence? - Do we need this compensation to safeguard the integrity of the CDM? - Would DOEs have the ability to compensate? (to-date almost 900 mil issued CERs) - When can a DOE be sure that no compensation will required any longer for a request anytime in future?

3. What are the objectives behind this procedure? (2) Incentive for (perfect) DOE performance - Are more incentives or penalties required beyond the accreditation standard and procedure? - How should the procedure create better quality? - Should any incentive be linked to the amount of emission reductions? - Do quality requirements depend on the size of a project? - Is professional negligence insurable? - Isn’t the loss of accreditation the most severe penalty?

4. What are the objectives behind this procedure? (3) A safety belt for the risk-based approach - Does the risk-based approach require a safety belt? - Should this be ruled on the costs of DOEs? - Isn’t reference to Marrakech Accords then only a fig leaf? - Shall we agree to something without precedence? - Wouldn’t this randomize the risk of being liable?

5. Risks and Liability without the procedure Integrity of the CDMIndividual DOE -excess-issuance not yet ruled -the system is kept responsible (liable) for leaking -missing incentives for DOEs beyond the accreditation standard and procedure -no claim in case of fraud or other willful or negligent acts -missing a regulation, which was foreseen in Marrakech Accords -Highest risk is reputational risk by the accreditation process with inherent financial risks

6. Risks and Liability with the procedure Integrity of the CDMIndividual DOE -cost increase for validation and verification services -reduction of supply of services -hurdles especially in LDCs -practicability when realizing the balancing process -reputational risk for the whole CDM in case of frequent applications -EB takes over liability for regulatory deficits -liability for issues out of management control -financial risks which may require terminating the whole business -missing limitation in volume and time span -long-term vulnerability -“missing safety belt”

7. Risks Mitigation Measures Measures under discussion - Insurance products - Capping, limiting risks - Disconnection from CER volumes - Set-aside for each project - Leaving market - No procedure at all - Designing a suitable procedure

8. Insurance Products - This kind of liability is not covered by regular liability insurance - But in principle everything is insurable: human error, fraud, professional negligence, its only a matter of finance - DOEs and insurance companies have difficulties to quantify likelihood, potential volumes and resulting risks - Expectation of high premiums to be added to service costs - Potential of market distortions, if insuring is not made mandatory

9. Proposed Next Steps DOEs have already collected internally views of what is deemed acceptable - Limitation to fraud and professional negligence - Financial penalties with cap and a commensurate ratio to service fees - No liabilities when there is ambiguous guidance (incl. period before VVS) - No endless (21+ years) liability for registrations - A concept with low likelihood that the procedure will ever be applied - A system which is enforceable (practically and legally) We suggest a closed workshop with UNFCCC secretariat, EB members and AP members

10. Werner Betzenbichler Chair of the DOE/AIE Forum Werner.Betzenbichler@bece-experts.com Werner.Betzenbichler@bece-experts.com Thanks for your attention