The Additionality Issue

Determination of additionality is inherently problematic because it requires resolving a counter-factual question : What would have happened in the absence of the specific project proposed for credit ? This question can be viewed as requiring a determination of the motivation of the project sponsors, and therefore an arduous project-by-project review that impose prohitive transaction costs. .Demonstrating additionality is, however, crucial to the integrity of the Clean Development Mechanism.

We can think of the following types of additionalities :

Financial additionality, that refers to whether project investment would have taken place in the absence of credit-gaining CDM provisions, and Environmental additionality, which states that emission reductions resulting from each project activity shall be certified on the basis of real, measurable and long-term benefits related to the mitigation of climate change. The hypothetical nature of additionality often generates definitional confusion and the need to determine the intent of the investor are components of challenge of applying additionality. This is further complicated by ‘no-regrets’ projects or other profitable ventures that have both economic and environmental benefits. However, such projects may not always pass a strict additionality test because they would be undertaken by the host country or the foreign investor anyway ( in the absence of credit-gaining CDM).

The Additionality Debate

The primary importance of the additionality debate is ensuring the environmental integrity of the Kyoto Protocol. Including b-a-u (non-financially additional) projects in the CDM will increase global GHG emissions. The same is true if lax methodologies prevent an accurate quantification of environmental additionality - ‘over crediting‘, CDM projects will introduce ‘paper tonnes’ into an international trading system. In contrast overly stringent definitions of additionality will discourage project implementation and exclude legitimate GHG reducing projects.

Public versus private funding

CDM projects can be funded by both public bodies and private entities. However, there ought to be a distinction between public and private funding, specially when projects in developing countries are considered .

Private funding of a project implies that a private entity is paying for a project out of its own resources. Thus, it will be driven by a profit motive, specially with respect to CDM projects that offer CERs. Under private funding therefore, the projects with the highest baselines and/or returns on investment will be preferred. Therefore, the private sector will be interested in taking up a project only when he can hope for it to generate cash flows that are larger in size than his investments. In other words, the value of the carbon offsets should be substantial compared to the costs. However, any such certified project activity should be additional, i.e., the GHG reductions must be additional to any that would otherwise occur in the absence of the CDM project.

Private funding bodies will be interested to invest in a project only when the return from the project (inclusive of credits) will be higher than their investment cost. To them, the financial aspect of the project will be more important than whether long term environmental benefits will have been derived. This is the private sector outlook.

The advantage of a public source of funding is that greater emphasis would be placed on the welfare aspects of the projects. The developmental objective would be foremost in terms of thrust areas. Hence, projects that are most necessary from the developmental point of view ought to be financed from public sources. Infact, these are the projects that will prove to be environmentally additional.

Accordingly, projects that demonstrate significant environmental additionalities should be accorded public funding sources.

Having looked at both private and public funding options with respect to additionality, the conclusion points at environmental additionality as the main vehicle of distinction. Public funding sources look at environmental additionality as their objective; private funding sources look at their own returns. Hence whether a privately funded project is ultimately considered will depend on whether the project generates long-term, real benefits. That is the yardstick to distinguish between public and private funding.

The Baseline Issue

Determining environmental additionality as developed earlier requires:

Several approaches, which are summarized below, have been put forth as possible methodologies for determining the baseline of a project. For simplicity, the methodologies are categorized into two general approaches - those derived from aggregate data or ‘top-down’ baselines and those determined case-by-case, or ’ bottom-up’ baselines. Within each approach, a baseline could be historical or forward-looking; dynamic or static; or rate or ‘tonne’ based.

Top down baselines

Top down baselines typically derive an ‘emission rate’ from the existing national or sectoral data or establish ‘a cap’ on company, sector, or national emission levels. Examples of top-down baselines, which often use precise metrics to capture the GHG intensity of a country or sector, include:*

To determine a project’s actual emission reduction (or its environmental additionality) during a given period, the national/sectoral emission rate (such as Kg C/MWh) is compared to the actual project emission rate (Kg C/MWh). The difference between the two rates, in terms of actual metric tonnes of GHG emissions, is the quantitative basis for determining CERs.

Bottom-up baselines

The key conceptual difference between top-down and bottom-up baselines or project baselines is that the latter are determined on a case-by-case basis. While top down approaches use aggregated national or sectoral data, bottom-up baselines do not require large amounts of national or sectoral data to formulate baseline. A project baseline may take the form of a benchmark emission rate or it may be a measurable amount, for instance tonnes of carbon equivalent.

But before emission reduction units are certified, it is necessary that the certifier ensures that the project really meets all the eligibility criteria as well as has met the quantified sustainable development indicators which are agreed upon between the host and investor country Parties at the project formulation stage. In case the S.D. indicators have not been met, the certification for emission reductions cannot be issued. It is however necessary that the operational requirements of CDM must be simple and not too complicated in order to enable CDM to have an early start even from 1 January, 2000 itself to benefit the developing countries. Maximum benefit to the developing countries should accrue from CDM during the period 2000-2008. Beyond this period, interests of the Annex I countries in CDM may wither very fast due to high transaction costs in CDM projects. AIJ/CDM Facilitation Centre (FC), as conceived by Development Alternatives, may be a mechanism to bring down such transaction costs of CDM projects in the Asia-pacific Region. Similarly, FCs may be initiated in Africa and Latin America as well. The FCs must be financially supported across the globe.

Establishing a baseline/reference line is essential for deciding project eligibility as well as for certification of emission reduction (CERs) during implementation since the baseline is central to certification and in deciding additionality.

Project specific baseline

There is not enough data available in most developing countries to make top-down approaches viable.

In the case of project specific baseline, following possibilities could be considered : Static baseline (Baseline 1), descending baseline (Baseline 2 - reflecting ‘natural’ technological improvement over time), a stepped baseline (Baseline 3) and the CDM project baseline (Baseline 4). Baseline 3 is to increase the investor’s confidence by assuming a predictable flat-line which remains for a fixed period of say 5 years. In any case, some form of periodic review is necessary to account for technological innovation, and for examining additionality.

Certification and Verification

The concept of certification and verifcation is embedded in the Article 12.5(a), (b) & (c), 12.6 and 12.7.

Article 12 refers to the following requirements relating to certification and verification :

The Definition

Article 12.5 of the Protocol deals with certified emission reductions. It states that the clean development mechanism shall be subject to the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to the Protocol on the basis of :

(a) voluntary participation approved by each Parties involved;

(b) real, measurable, and long-term benefits related to the mitigation of climate change; and

(c) reductions in emission that are additional to any that would occur in the absence of the certified project activity.

Certification : A procedure by which an independent accredited body gives written assurance that emission reductions and sustainable development achievements that are claimed, have been actually achieved.

Monitoring : Periodic systematic surveillance / measurement of performance.

Verification : Evaluation of the results that have been achieved against pre-set criteria.

Validation / Certified Project Activity : Approval of a project design that meets the two objectives of CDM which are -

(i) emission reductions / avoidance; and

(ii) sustainable development.

Criteria for certification

Certification of emission reduction produced by CDM projects must be undertaken by ‘operational entities’ designated by COP/MOP. These could be national or international bodies.

It is important to recognise that the Kyoto Protocol does not require ‘operational entities’ to be ‘independent’. But the certification is not done by the COP/MOP or the Executive Board. Certification bodies would be involved in an essentially managerial task that involves verifying that project activities conform with all the standards and processes specified by the COP/MOP. Before certification by such entities, it must be ensured that sustainable development criteria have been met for CDM projects because that is the prime purpose of this mechanism under the Protocol.

Prior independent auditing and verification procedure would ensure operational entities could only issue CERs for projects that had satisfied the independent auditors and met verification standards. This would provide a powerful check on ‘operational entities’ to minimise bureaucracy, incompetence and inflated claims for CERs. If an operational entity continually failed to satisfy the auditors and if verification revealed gaps between project documentation and reality, COP/MOP could suspend the right of that entity to certify projects.

Article 12 does not provide any guidance on how operational entities should be selected. There should be, however, more than one such operational entity in a country/region. NGOs could be designated as operational entities who have established their credibility in such areas. Development Alternatives (DA) is in the process of capacity-building to take up this challenging task of being an ‘operational entity’ for India and the Asia-Pacific Region.

Dispute Resolution

In the process of certification of CERs, CoP/MoP may have to establish a mechanism of dispute-settlement between the CDM Executive Board and public and private Institutions participating in the CDM.

Steps for Certification and verification *

Ist Step: Ex-ante certification projects

Ex-ante certification pojects involve the following issues:

Traditional certification relies heavily on technical skills and good auditing practices, the ex-ante assessment of project baselines would also require significant insights in economic modeling, incentive mechanism and development issues.

2nd Step: Project Specific monitoring framework

A second step could be to establish a framework for how the specific project would be monitored during the life time, how measurements would be made, who would be responsible for these, how results would be verified. This step would be similar to ISO 9001 and 14001, and should form an integral part of the basic project agreement between the host and investor, and standardized significantly over time.

3rd Step: Verification of emission reductions

This would entail auditing the physical measurements that are done at the project site, as well as the comparison of the emissions with the baseline that was established for the project, and the computation of the resulting reductions. Verification would also include review of the compliance with the established framework for project monitoring. These functions are also quite similar to what is done under established schemes such as ISO or EMAS. The verifier would issue a report after each periodic verification.

4th Step: Certification of emission reductions

The certification of emission reductions will be issued by an operational entity designated by COP/MOP to the Kyoto Protocol in conjunction with the monitoring and verification report. A detailed guideline for certification and verification would be necessary in this regard to be issued by the UNFCCC.

Format for reporting