CDM Methodology
World Bank Carbon Finance:
Interpretations and Approaches to
Baselines, Monitoring and
Calculation of Emission Reductions
Bonn, 6 June 2003
Johannes Heister – PCF, Carbon Finance Unit, World Bank
Assumptions and Principles
• Know what we want to achieve.
– Do we have a common understanding of the objective?
• The world is a well-structured, intelligible place.
– Are we able to understand and predict human actions and developments
through analysis and synthesis?
• Information (facts) plus rationality (reasoning).
– Are we able to collect a complete set of relevant observations and produce
consistent arguments?
• Methodologies reduce complexity and need for judgments.
– Methodologies must have discriminatory power, but how do we choose the
“right” methodology?
• Keep a skeptical mind.
– Are we willing to correct predictions on the basis of new observations?
PCF baseline and monitoring philosophy
• Produce highly credible ERs
– carry a public premium: they promote the CDM
– lack of integrity can damage the CDM.
• Experiment!
– find out what works: as a methodology and for the CDM as
a market based instrument (reasonable requirements)
– with transparency, methodological rigor and intellectual
honesty (prototype)
– evolutionary approach: be ready to change course
• Political dimension
– Baseline methods can have distributional implications
– political guidance therefore necessary (EB, Parties)
What are the basic concepts?
What is the PCF approach to
additionality and baselines?
CO2 Emissions
Additional CO2
emissions reduction
Real, measurable
and long-term
Years
Emission Reductions:
Genesis of a seemingly simple idea
1995: Activities Implemented Jointly (AIJ) pilot phase
Projects
 Emission Reductions
Additionality: criteria
investment
program
financial
regulatory
technological
emissions
?
Baseline: methods
project specific
standard baseline
1997 Kyoto Protocol: “Reductions in emissions that are additional to any that
would occur in the absence of the certified project activity.”
Emission Reductions:
Genesis of a seemingly simple idea
2001: Marrakech Accord: “Environmental additionality”: = emission reductions
Baseline: = scenario that represents emissions …
Baseline scenario
project specific
Emission reductions
estimate
Additionality
of a project
Another interpretation:
Emissions baseline
sector wide ?
standard ?
Additionality
(of a technology)
Emission Reductions:
Genesis of a seemingly simple idea
2003: Project Design Document: “Project additionality”:
“Description of how the baseline methodology addresses the calculation
of baseline emissions and the determination of project additionality”
5th Methodology Panel: “Emissions baseline”:
Ex post calculations of baseline emission rates shall not be used. The
baseline emission rates must be calculated and reported ex ante.
Project additionality
“but-for” test?
Emissions baseline
Ex ante projection,
conservativeness
Emission reductions
calculation
Issues
• Project versus environmental additionality:
=> but-for test or “stylized” baseline
methodologies?
• Ex ante factors & conservativeness:
=> or monitoring and ex post factors
• Scope of methodologies
=> role of Operational Entities
• PDD Format
What is a baseline ??
COP-7 – defined baseline for CDM
(44) The
baseline is the scenario that:
“reasonably represents GHG
emissions that would occur in the
absence of the proposed project
activity”
Scenario defined
Webster’s dictionary:
– A sequence of events especially imagined.
– An account or synopsis of a possible course of
actions or events.
Baseline scenario defined
WB CF definition:
 The the most likely course of action and
development over
PCF – baseline scenarios defined:

The relevant baseline scenario is the most
likely course of action and development over
time.

The baseline scenario can include development
alternatives that may be realized at yet
unknown points in time, if such developments
can reasonably be anticipated.

The baseline scenario is not an emissions
baseline (such as an emissions factor).
How to measure ERs?
CO2 Emissions
monitoring plan &
calculation concept
Years
Why is a monitoring
methodology important?
• More information on how a baseline scenario
develops becomes available over time.
(Increased credibility)
• The monitoring concept can deal with issues
that the baseline study cannot address.
(Reduced complexity)
• A good monitoring concept ensures the
credibility and verifiability of the maximum
number of ERs. (Less conservative)
Two components of monitoring plans
1. Emission reduction calculation concept
–
–
Rational and assumptions
Variables, parameters, formulae
2. Instructions for data collection
===> For project – and for baseline, too?
WB Carbon Finance: project design involves three distinct elements.
Baseline scenario
Calculation concept
Emission reductions
Monitoring Plan
How to project ERs
• Use the project design (baseline, calculation
concept)
• Make reasonable assumptions about the data to
be monitored
• Run the calculation tool (spreadsheets)
What is the Emission Reduction Study?
• Forecasts
– emissions in baseline scenario
– emissions in project scenario
– expected emission reductions
• Establishes environmental additionality
• Provides structured risk information by simulating ER
calculation (sensitivity analysis)
• Is a basis for informed negotiations
Summary of steps & PCF document system
Project Design Document (PDD)
Baseline
method
Baseline Study
(What is the baseline scenario?)
Data input: metered variables
Gross electricity production
Volume of landfill gas sent to
engines
Volume of landfill gas flared
Volume of landfill gas extracted
from baseline wells
Volume of landfill gas extracted
from project wells
Methane content of landfill gas
(based on laboratory analysis)
Generator heat rate
Proportion: gas combusted in
flares (flare efficiency)
Calorific content of methane
(How to measure ERs?)
Equation
H
3
X
m3
C
m3
B
m3
A
m
Jan
Feb
Mar
Apr
h
a
GJ/m3
t/m
Global W arming Potential of
methane
3
GW P/t
0.97
0.97
0.97
0.97
j
0.037
0.037
0.037
0.037
e
0.000714
0.000714
0.000714
0.000714
23
23
I = h*H/1000000
f
#REF!
23
#REF!
23
#REF!
#REF!
t
J = (I/j )*e
#REF!
#REF!
#REF!
#REF!
t
K = C*a*c*e
0
0
0
0
Calculation from electricity production (primary method)
Total energy input to engines
Tons of methane combusted
in engines
Proportion: Methane in landfill
gas (based on power output)
Tons of methane combusted in
flares
Proportion: contribution of
project wells to total gas
Net amount of methane avoided
Emission Reductions
GJ
c = J / e * X
k = (X+C-B) /
(X+C)
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
t
M = (J+K)*k
#REF!
#REF!
#REF!
#REF!
t CO2equ
N = M*f
#REF!
#REF!
#REF!
#REF!
baseline study
s
baseline emission
tly
(hypothetical, par
monitorable)
monitor using
s and
 time indicator
proxy variables
Additional ERs
project emissions
(actual)
Monitoring
method
ER Study
measure directly
 or using emission
indicators
monitoring plan
Emission Reduction Study
(How many ERs to expect?)
(Note: all flow data are monthly aggregates)
Y
Technical parameters
kJ/kW h
W eight of methane
Monitoring Plan
Unit
kW h
ER
Simulation
Years
Baseline Study
Two Baseline Filters
• Boundary for possible baseline scenarios
– where do you look?
• Possible alternative scenarios to provide service
– first filter:
– identify constraints: legal, political, economic, costs ...
• Plausible alternative scenarios (short list)
– second filter:
– chose baseline method: justify why most appropriate
– apply method and determine:
• => the most likely baseline scenario
How to structure baseline studies?
Information on: CDM modalities, country and sector, legal and other constraints and
requirement, proposed project, project context etc.
Possible
baseline scenarios
Possible
baseline methods
Constraints and
requirements
Criteria for baseline
method selection
Plausible baseline scenarios (shortlist)
Baseline method
selected and justified
Baseline scenario
determined
Monitoring and ER calculation concept
Ten rules on baselines
1. Each project must have a baseline.
2.
The baseline must be established on a project-specific basis
(for now), and in a transparent and conservative manner.
3. The baseline is the scenario that describes the most likely
course of action and development in time (including alternative
futures if anticipated and observable).
4.
Scenarios are concrete: a sequence of decisions and events, a
physical configuration, not simply a trend or a projection (of
emissions) or an emissions baseline.
5.
The baseline scenario is selected from a number of plausible
scenarios, which must include the proposed project.
Ten rules on baselines
6.
The selection is made by applying an appropriate baseline
method, which builds on one of the Marrakesh approaches.
7.
The baseline method must be justified: it must be an
appropriate simulation of the decision making regarding the
proposed project.
8.
“Environmental” additionality is the only relevant additionality
criterion; it requires only to show that the difference between
projected baseline and project emissions is positive.
9.
Aspects of both the project and the baseline scenario should be
monitored, wherever possible at reasonable costs.
10. Baseline determination and monitoring / calculation of
emission reductions is done by different, yet complementary
methods.
Methodology for
grid-connected power projects
Power Sector Projects
System capacity
Thermal
Dispatch
margin
Dispatch
Hydro
Base load
Coal
Coal
Base load capacity
replacement
Wind
Major capacity
addition
additional?
Micro capacity
addition
Grid connected power projects
• Project expands generation capacity
• Baseline scenario often well known: usually
– the existing power grid and generation capacity
– plus the power expansions path over time
• Often unknown: Would the project be part of
system expansion? I.e. … part of the baseline
scenario?
• Cost / kWh test: Are generation costs higher than
alternative options?
Baselines for power projects
• Comparison of investment alternatives on the
basis of cost per kWh is typically used in
planning of power system expansions.
• Since there are only two alternative scenarios
– The power system with the project
– The power system without the project
•  a cost criterion is used to determine the
baseline scenario.
•  Methodology: step-by-step instruction on how
to use the criterion
Three least cost baseline methods
for power projects
1. Run expansion planning model with project:
 is project not being picked up by the model?
2. Use expansion planning model to determine long-run
marginal cost (LRMC):
 is project cost (per kWh) higher than LRMC?
3. Determine low/least cost project to represent expansion
option:
 is project cost higher than cost of comparable
expansion option?
=> If yes: the baseline is the power system without
the proposed project
Calculation concepts for power sector
emissions reductions?
• Project-by-project dispatch margin analysis?
– Ex post monitoring: Which power source is displaced at
the operating margin?
– Central coordination to prevent double counting of
displaced marginal generation
• Sector averages, e.g. combined build and
operating margin
– Simple and inexpensive, no central coordination needed
– Can grossly over- or underestimate actual ERs
• Ex post vs. ex ante emission factors
Chile: 5th Region Generation and Dispatch
to Meet Future Demand (to scale)
GWh
18,000
16,000
New 300 MW CC plants
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Chacabuquito
Existing Hydro
Combined Cycle
Dispatched Coal
Emission Factors for Avoided Grid Dispatch
Σ kWh supplied by small projects
 electricity generation replaced by SPs
 Emission Factor (EF) for avoided dispatch
kWh x
EF
ERs
Project 1
kWh x
EF
ERs
Project 2
kWh
x
EF
ERs
Project 3
Thank you! … & Questions?
http://www.carbonfinance.org