Application of Multi-project Baseline Methods in Practice
by Wytze van der Gaast, Foundation JIN
Contact: tel. 0031 50 3096815; e-mail: jin@jiqweb.org
Introduction
A JI or CDM project is a GHG-neutral investment. A country with an assigned amount of GHG
emissions under the Kyoto Protocol could increase this amount by reducing GHG emissions through a
project on the territory of another country. If transaction costs are assumed to be zero and if it is assumed
that baselines at all times correctly represent the situation in absence of the project, the allocation of
projects takes place on the basis of an international comparison of marginal abatement costs only.
However, the theoretically optimal allocation of projects could be disturbed in the real world where
transaction costs exist and the baseline is surrounded by uncertainties.
With transaction costs, the marginal cost curves for JI/CDM emission reductions (serving as the supply
curves) shift upwards as for each quantity supplied the supply price (excluding transaction costs) is
increased by the transaction costs (e.g., project design costs). Typical transaction costs for JI/CDM
projects (the GHG emission reduction component) are costs related to: identifying the project; obtaining
approval of the project idea by the host country government; compiling the project design document;
negotiating the emission reduction purchase agreement (ERPA) with the host country government and
relevant institutes; validating the project design; and, registering a project with the JI and CDM
supervisory bodies.
In a recent overview based on actual CDM projects (excluding small-scale projects), Ellis et al. (2004)1
found that the CDM-related transaction costs could vary from US$ 50,000 per project to almost US$
270,000. According to Ellis et al. (2004), even the lower cost figure implies that a project would need
around 10,000 tonnes emission reduction credits over a crediting lifetime to cover transaction costs
(assuming a credit price of US$ 5). Moreover, several programmes established to generate CDM credits,
such as the Rabobank Carbon Fund, the KfW Bankengruppe Fund, and projects established under the
CDM programmes of the Netherlands Government (e.g., CERUPT), have, in order to be able to cover
transaction costs, set a minimum to the amount of Certified Emission Reductions (CERs) that proposed
CDM projects must deliver during the crediting lifetime (in most cases 500,000 tonnes). Finally, the
intermediate evaluation of the Dutch JI policy in 2005 showed that the transaction costs related to the
Jane Ellis, Jan Corfee-Morlot, and Harald Winkler, 2004. Taking Stock of Progress with the Clean Development
Mechanism (CDM), OECD.
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purchase of JI credits by the Netherlands Government amounted to almost 25% of the nominal prices
paid for these credits.2
The inclusion of a large set of modalities and procedures for baselines in Decision -/CMP.1 of the
Conference of the Parties serving as the meeting of the Kyoto Protocol Parties (COP/MOP-1), as well as
the specific additional rules set by the programmes of individual governments and multilateral funds, has
resulted in a rather large share of baseline-related costs in the overall transaction costs of the project
design. For example, estimates in Krey (2003) show that, depending on the complexity of the project and
its baseline, transaction costs related to baseline determination have thus far amounted to between US$
20,000 and US$ 25,000 per CDM project, which is higher than search, monitoring and validation costs,
but lower the negotiation and project approval costs.
High transaction costs as a result of detailed baseline rules or the overestimation of emission reductions
due to inflated baselines in case of too lenient rules results in an allocation of JI and CDM projects which
differs from an allocation based on an international comparison of marginal abatement costs only. With
high transaction costs it becomes less attractive for investors to participate in JI and CDM projects so that
the Kyoto Protocol compliance costs for industrialised countries increase. On the other hand, due to
baseline inflation JI/CDM projects are no longer GHG-neutral and do not contribute – or at least to a
smaller extent – to reducing GHG emissions globally.
With a view to the above, several literature sources have recommended standardising baseline
determination for JI and CDM projects.3 First, with multi-project baselines costs related to compiling the
project design document and the validation of the baseline could be considerably reduced. Second, with a
multi-project baseline methodology, the scope for baseline inflation by project developers is much
reduced, especially when the baseline emission factors are standardised.
A possible disadvantage of standardised, multi-project baselines is that they, in their turn, could also affect
the allocation of projects. An example may clarify this. Suppose that in a particular country energy is
produced by both coal and gas-fired plants. In this country, a JI project aims at installing a modern gas
boiler which emits fewer GHG per unit of output than both the existing gas and coal plants. Should for
the power sector in this country a multi-project baseline be determined based on the average emissions of
the existing plants, its emissions would be higher than those of the gas-fired plants and lower than those
of the coal-fired plants. Consequently, a JI project investor who replaces a coal plant by a modern gas
boiler only receives credits for the emission reductions below the multi-project baseline and not for the
full reductions achieved. Should the investor instead replace an existing gas boiler, the amount of credits
would be larger than the emission reductions actually achieved. This could reduce the incentives for
investors to invest in coal plants. In order to prevent such an adverse incentive, multi-project baselines
CE, 2005. Interim Evaluation of the Dutch Joint Implementation Programme, Delft, the Netherlands, p.10, table 5.
See for a literature overview, JIN et al. 2003. Procedures for Accounting and Baselines of JI and CDM projects,
Groningen, the Netherlands.
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could be determined per fuel or fuel technology; for example, one multi-project baseline covering the
existing coal plants in the country and one for the gas boilers.
Also the choice of the region covered by the multi-project baseline is important for the extent to which
the baseline can be considered reasonable. In several JI countries differences exist between regions within
potential JI host countries in terms of industrialisation, energy intensity and GHG intensity of production
and consumption. Determining national average multi-project baselines for these countries could imply
that these would not be representative for each of the regions. Therefore, it is important that a multiproject baseline is sufficiently representative for the region where the project is implemented.
An important standardisation of baselines and baseline methodologies has been the approval of baseline
methodologies by the CDM Executive Board (CDM EB). Once approved a methodology can be used for
a multiple of other projects of the same type. In the actual practice of the CDM, this has led to a number
of different methodologies approved for one project category. A next step towards standardisation is that
these methodologies are somehow merged into one consolidated methodology per project type. Each
entity that intends to invest in a project of that type could subsequently apply the consolidated
methodology for the project and ‘only’ needs to fill in the project or country-specific data in order to
determine the baseline, e.g., project activity level, project-specific weighting factors (if applicable), and
specific data for the host country.4
A considerable step further in the direction of baseline standardisation is the calculation of multi-project
GHG emission reduction factors (i.e. benchmarks) for a particular project type in a particular host
country. This type of standardisation is most far-reaching as it reduces baseline determination to an effort
of multiplying the project activity level within the project boundary (e.g., number of kWh per year) with
the benchmark emissions factor. An early and, thus far, only example of such a benchmark application can
be found in the Dutch ERUPT programme for JI projects, which, as of its second round in 2001, offers a
table with benchmark CO2 emission factors for electricity sector projects in each Central and Eastern
European country. The process of standardising baselines and baseline procedures has thus far been
primarily a bottom up exercise with standards being developed based on a number of individual CDM
project baselines.5
Scope for multi-project baselines for JI projects in the ‘Marrakech Accords’
Further to the Marrakech Accords, the COP/MOP-1 has provided clear references to standardisation of
baselines for JI projects. For example, Decision -/CMP.1 on JI (‘Guidelines for the implementation of
Article 6 of the Kyoto Protocol’, Appendix B) states that a baseline shall be established “[o]n a projectspecific basis and/or using a multi-project emission factor.” Next to a clear reference to standardisation of
baselines, it also indicates that applying a project-specific baseline methodology does not exclude
standardisation of certain baseline parameters.
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See http://cdm.unfccc.int/methodologies/Pamethodologies/approved.html
Naoki Matsuo, 2000. Proposal for step-by-step baseline standardisation for CDM, IGES, Kanagawa, Japan.
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A strong reference to developing multi-project/standardised procedures for CDM baseline methodologies
can be found in Appendix C to the Draft decision -/CMP.1 (Article 12). The Appendix states that the EB
shall provide guidance on the “appropriate level of standardization of methodologies to allow a reasonable
estimation of what would have occurred in the absence of a project activity wherever possible and
appropriate,”6 which is a clear reference to multi-project baselines. In addition, the EB shall develop and
recommend to the COP-MOP specific guidance on the “[d]efinition of project categories (e.g., based on
sector, sub sector, project type, technology, geographic area) that show common methodological
characteristics for baseline setting.”7 Finally, COP/MOP-1 adopted the decision that the CDM-EB shall
explore the possibility of using “[d]ecision trees and other methodological tools, where appropriate, to
guide choices in order to ensure that the most appropriate methodologies are selected, taking into account
relevant circumstances.”8
Early experiences with baseline standardisation: the Dutch JI tenders
In 2000, the Netherlands Ministry of Economic Affairs launched a tender programme for JI projects,
called ERUPT (Emission Reduction Units Procurement Tender), which is managed by the government
agency SenterNovem. Together with the World Bank’s Prototype Carbon Fund (PCF), which started
more or less at the same time and in which the Netherlands Government is also an investor, ERUPT
faced the challenge of translating the Kyoto Protocol into detailed modalities and procedures for the
project cycle of JI (note that the Netherlands initiated ERUPT about a year and a half before launching a
similar tender for the CDM, called CERUPT), without the guidance of the Marrakech Accords, which
became available only in November 2001. For this purpose, a detailed Guidelines document was prepared,
which explained project developers how to determine a baseline and how to deal with other JI accounting
issues such as additionality and leakage. After the first ERUPT round, these Guidelines were reviewed
based on the experiences of project developers and auditors who had to validate the project design
documents.9
The ERUPT Guidelines document and its revised version were an important step in the direction of
standardising procedures for baseline determination because all project developers proposing projects to
ERUPT had to use the same procedure. Next to the standardised key-factor approach, the revised
ERUPT Guidelines also standardised particular parameters of baseline determination, such as the
definition of the project boundary, i.e. which emission sources to include in the baseline, and defining the
additionality concept. In addition, the revised Guidelines contained multi-project baseline/benchmark
values for the electricity sectors in potential JI host countries in Central and Eastern Europe. The use of
these benchmarks under ERUPT has been optional; project developers who feel that the benchmark value
Para. (b)(v) of Appendix C to Decision -/CPM.1 (Article 12).
Para. b(i) of Appendix C to Decision -/CPM.1 (Article 12).
8 Para. b(iv) of Appendix C to Decision -/CPM.1 (Article 12).
9 Ministry of Economic Affairs, 2003, Operational Guidelines for PDD’s of JI Projects, the Hague, the Netherlands.
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do not reasonably represent their specific project baseline case, have been free to develop their own
baseline emission factors, provided that they use the key-factor approach.
When calculating these benchmarks, the following key issues had to be dealt with:

How to deal with low variable cost power capacity? Since power plants that operate at very low
variable costs are usually operated as many hours as possible, they are very unlikely to be dispatched
when new power production capacity becomes available. Examples of such capacity are run-of-river
hydropower, co-generation and nuclear power plants.

How to incorporate the EU pre-Accession process of Central and Eastern European countries into
the benchmark calculation? Candidate members of the EU have to incorporate EU standards
(collected in the Acquis Communautaire) in their domestic laws, but by the time of calculating the
ERUPT benchmarks (2001), negotiations between the European Commission and the countries that
were scheduled to become EU member state in May 2004 had not yet clearly revealed to what extent
these countries would be allowed a transition period to postpone incorporating the standards until
after the accession date (countries such as Bulgaria and Romania had not yet begun pre-accession
negotiations with EU).
Baseline standardisation under the CDM
As per February 2006, the CDM-EB has approved 27 baseline and monitoring methodologies for CDM
projects. With an increasing number of approved methodologies, there could be a considerable variation
in how emission baselines are determined for similar projects. This trend was observed in Ellis (2003) who
categorised the baselines used in ‘operating margin’ (the effect of a project on the operation of power
plants on the grid), ‘built margin’ (the effect of a project in terms of delaying or avoiding the construction
of future power plants), and ‘combined margin’ types of baselines (a combination of operating and build
margin).10 However, even within these baseline categories different methods had been used. For example,
some methodologies identify within a particular host country a currently operating plant that would have
been dispatched in case of newly added capacity. Other methods, instead, apply an operating margin
method by taking a weighted average emission factor for the grid as a whole.
In order to harmonise methodologies per project category, the EB has consolidated methodologies per
category, eight in total. These consolidated methodologies would function as standardised baseline
methodologies and could be used by all project developers proposing a project in the category concerned.
Contribution of multi-project baselines to practicality and environmental integrity
Baseline standardisation does not necessarily lead to a trade-off between environmental integrity and
scope for application. On the one hand, standardisation, in order to reduce transaction costs related to the
Jane Ellis, 2003. Evaluating Experience with Electricity-generating GHG mitigation projects,
COM/ENV/EPOC/IEA/SLT(2003)8.
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project design, would be more aggregate and could be less precise than individual project baselines, which
could reduce the environmental integrity of JI projects. On the other hand, standardisation reduces the
scope for overestimating emission reductions from projects by project developers and enables projects in
sectors where only policy-based projects are feasible (e.g., transport, built environment) or where the
capacity replaced by a project cannot be clearly identified (e.g., greenfield, grid-connected renewable energy
projects). Application of multi-project baselines to these sectors and project types would broaden the
scope for JI and the CDM, which would enhance environmental integrity. Finally, multi-project baselines
can provide a simplified alternative for host countries for which data availability and/or data quality are
problematic for single-project baseline determination.
Organisation of multi-project baselines under JI
Baseline standardisation through templates (standardised procedures) or multi-project emission factors
(benchmarks) have thus far taken place at the initiative of project developers submitting project proposals
to the EB and of governments through tender programmes (e.g., ERUPT, CERUPT, PCF). The role of
the COP and its bodies has thus far been mainly a passive one. The COP had set boundary conditions for
baseline determination, including the notion that multi-project approaches are eligible under JI and CDM,
provided that they are sufficiently representative for the project-specific case.
Given the benefits from baseline standardisation in terms of increasing environmental integrity, reducing
project-specific transaction costs and increasing transparency of procedures, it is recommended that future
procedures for standardisation of JI baselines take place in a top-down context instead of the present
bottom-up practice of the CDM. The latter has proven to be rather time-consuming and sub-optimal in
the sense that the determination of a standardised/multi-project baseline in itself may require more time
and data than one project-specific baseline, as it generally requires a macro and/or sector analysis. The
JI/CDM practice has shown that project developers are generally reluctant to develop multi-project
baseline methodologies, because once approved, other investors can freely use these methodologies
without compensating the initial developers.11
It is recommended that the determination of multi-project baselines (benchmarks) is managed under the
auspices of the JI-SC and carried out by independent experts who determine benchmarks on behalf of JISC and update the scenarios.
Finally, it is instructive to observe that multi-project baselines meet the JI baseline criteria set by the
COP/MOP-1 in that:
a. They could both be standardised procedures with largely project-specific data and/or contain multiproject emission factors per unit of activity level; both these applications are allowed under the
COP/MOP-1 decision on JI baselines.
Wytze van der Gaast, W.P., 2005. Baseline standardisation for JI Track-I projects, presentation at JI Track I
workshop, Prague, Czech Republic, 7-8 September 2005.
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b. Standardised/multi-project baseline methodologies would increase transparency with regard to the
choice of approaches, assumptions, methodologies, parameters, data sources and key factors to a level
beyond the transparency of project-specific baselines;
c. Multi-project baseline parameters generally cover a sector and/or country/region as a whole, which
implies that they have take into account the host country context, relevant national and/or sectoral
policies and circumstances, such as sectoral reform initiatives, local fuel availability, power sector
expansion plans, and the economic situation in the project sector;
d. Since the multi-project baselines would be expressed in emission factors per unit of activity level, no
ERUs can be earned for decreases in activity levels within the project project boundary or due to force
majeure. With respect to output changes outside the project activity, it may be considered to explore
indirect GHG emission sources (which are outside the project boundary and cannot be controled by
the project participants). Any change in activity and related GHG emissions change in these indirect
sources are considered leakage and must be incorporated in the calculated emissions of the project
itself, provided that these changes are significant
e. As any form of baseline determination multi-project baseline determination is surrounded by
uncertainties due to the hypothetical character of the scenario. Multi-project baseline determination
could be accompanied by an uncertainty analysis and in case uncertainties are relatively high,
conservative assumptions could be made.12
See JIN, 2003. Procedures for Baselines and Accounting of JI and CDM Projects, Groningen, the Netherlands,
Chapter 5, www.jiqweb.org.
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