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Creating the Carbon Asset:
PCF Approaches to
Additionality, Baselines,
Validation and Verification
Project Cycle: Overview
PCF Baseline Development
Validation, Verification and Certification
Part I
What are the basic concepts?
What is the idea of the CDM?
• Reduce GHG emissions in one country
to permit an equivalent quantity of GHG emissions
in another country, without changing the global
emission balance
• Emission Reductions (ERs) must:
– Create real, measurable, and long-term benefits related to
the mitigation of climate change. (Art. 12.5b)
– Be additional to any that would occur in the absence of
the certified project activity. (Art. 12.5c)
What is the PCF Approach to Additionality
and Baselines?
CO2 Emissions
Additional CO2
emissions reduction
Real, measurable
and long-term
How to figure out
what baseline emissions are?
• Beliefs about what would happen are a starting point
 Possible baseline scenarios
• but beliefs are not sufficient: a methodological approach
is needed, which can be tested
 Various baseline methods
 Determine the relevant baseline scenario
What are baseline scenarios?
• Baseline scenarios depend on identified (supply/service)
problem, not on proposed project:
– How can a particular product or service be delivered?
– Principle of service equivalence: Comparison with service (e.g.
electric power) in the baseline scenario
– Examples: electricity production using coal, natural gas,
biomass, hydro etc., and heat production using individual
boilers, district heating
• Baseline scenarios establish the emissions that would
otherwise occur in the absence of the project, not
– What is the time profile of different technologies?
– What is the regulatory and policy framework?
How to measure emissions?
• Project emission are directly observable /
• Baseline emissions are hypothetical / counterfactual
 But often real time indicators can help tell what would
•  Develop a Monitoring Plan
– Take measurements / monitor emission indicators
– Calculate / assess baseline and project emissions
How to be sure that emission reductions
are real, measurable and long-term?
• Baseline Study
• Monitoring and Verification Plan
 Validate
(before project construction)
• Monitoring records
• Emission reduction calculations
 Audit / Verify / Certify
(during project operation)
Part II
How does the PCF determine
project baselines?
How does the PCF system
for baseline establishment work?
• At PIN stage
– Baseline discussions with PCF team
• Preparation of PCN
– Discussions with project proponent
– Possibly reconnaissance missions
• After PCN
– Formal Baseline Study
– Validation
What is the purpose of the
baseline study?
• The baseline study
– Is a systematic and methodological analysis to
determine the most likely development scenario and its
evolution in time in absence of the Kyoto Protocol
– Is the basis for the projection of emission reductions.
– Credibly demonstrates environmental additionality.
– Provides all arguments, facts and evidence in support of
the determined project baseline, so that the baseline can
be validated.
PCF baseline process
Criteria for baseline
method selection
baseline methods
Information on
Baseline method
 project
baseline scenarios
Baseline scenario
 project context
 Kyoto Protocol
 etc.
Monitoring and Verification Protocol
Emission Reduction Study
Which baseline methods
has the PCF applied to date?
• Project-by-project methods
Investment / financial analysis
Scenario analysis
Control groups
Expert opinion
 Latvia, Morocco, Chile
 Uganda
 (Brazil, Latvia MVP)
 (Uganda BLS)
• Standard-oriented methods
– Sectoral baselines, emission factors,  (Costa Rica, Chile)
– Technology matrix, default baselines,
Top-down baseline, ...
• Hybrid methods
– Political guidance on key parameters
– Guidance on how to treat policy decisions (policy baselines)
Investment analysis is a rigorous approach ...
• Behavioral assumption:
– Rational investor maximizes return on investment under given
constraints: financial analysis
– Public decision maker maximizes public benefit under given
constraints: economic / cost-benefit analysis
• Baseline definition:
– The baseline is the (time dependent) investment alternative
(scenario) with the highest IRR or the highest NPV or the
lowest costs (all risk adjusted).
– not considering GHG emissions or the value of ERs.
… and an established methodology …
• Distinguish between private and public sector projects.
• Create a menu of investment alternatives (scenarios)
– that deal with the problem on hand / satisfy an identified
demand (service equivalence).
– include only plausible scenarios (constraints)
– include zero investment scenario (BAU) and proposed
– Include alternative investment start times
• Determine investment constraints and parameters
(regulatory policy, costs, risks, etc. – but not ERs).
How has the PCF applied
investment / financial analysis?
Example: Latvia – solid waste management
• Treated as a private sector investment
• Plausible investment scenarios were described and
analyzed by Task Manager in a feasibility study
• Financial and Economic IRRs were provided
• Ranking of alternatives with and without carbon value
• Baseline: highest IRR without carbon value
• Project: highest IRR with carbon value
Liepaja: Economic Analysis of Alternatives
Internal Rate of
PCF project
IRR without C revenues
IRR with C revenues
How has the PCF applied the
least cost method?
Examples: Morocco, Chile
• A public (Morocco) or a private (Chile) sector project?
• A comparison of investment alternatives on the basis of cost
per kWh is typically used in power projects planning.
• The PCF methodology examines the:
– Expansion plan: Additionality of investment
• What is the next system expansion?
• What is the system’s long-run marginal cost?
• When would the proposed project be implemented?
– Dispatch model: Emission reductions
• Which power source is displaced at the operating margin?
• MVP bases verifiable ERs on observed dispatch.
Chile: 5th Region Generation and Dispatch
to Meet Future Demand (to scale)
New 300 MW CC plants
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Existing Hydro
Combined Cycle
Dispatched Coal
Scenario analysis is difficult
• Not very well defined as a methodology.
• Use if non-economic constraints are predominant
• Employ a multi-dimensional, risk-based scenario analysis,
to identify most likely course of development
• Attempt to understand and describe all aspects and
circumstances that contribute to an investment decision, in
particular risks and other barriers
• Combine with other methods if available (e.g. costs)
• Provide data and/or expert opinions and references that can
be confirmed by a validator.
• Note: The project proponent’s or consultant’s beliefs or
simple statements cannot be validated.
How has the PCF used
scenario analysis?
• Example: Uganda – small scale hydropower
• Options:
– Business as usual:
diesel gen-sets
– Local hydropower
– Grid connection
• Barriers
– Investment risks
– High costs
– Market structure /
– Weak institutions
How has the PCF used
scenario analysis?
Example: Uganda – small scale hydropower
• Undertake multi-dimensional, risk-based scenario analysis
– Investment risks (expert opinion), cost analysis, market structure
• Analysis identifies and describes reasons, why
– grid extension is currently not a feasible option
– hydro development is too risky to occur without intervention
– current situation (small gensets) is least risky and would persist:
 baseline
• Baseline study backs these findings with “confirmable”
information (e.g., expert opinion)
• MVP checks if baseline study claims remain valid
– Indicators for grid extension and major fixed-asset investment in
West Nile region
How to use control groups?
• Two types of control groups
– Different group of consumers or facilities that are not involved
in and/or affected by the CDM project
– Same group of consumers or facilities before implementation of
proposed project (historic baseline)
• Control group must be situation-specific
– The selected control group is the baseline: Describe the
– Must be similar in all aspects but for the CDM project
– Often complicated, but can be combined with other methods
– Useful for projects with large number of units (e.g. households)
How to use control groups?
• MVP to measure critical control group indicators
– If possible, use observed control group emissions as
baseline emissions
– Combine control group data with other relevant data in
project area, such as activity level
• Distinguish two questions:
– What is quantity of baseline emissions?
• Decreasing baseline emissions as members of control group
switch to new technology?
• Replace new technology in control group with old technology?
– When does the baseline shift?
• How many members of control group have to switch?
How has the PCF used
control groups?
• Control groups often used to project and measure
baseline emissions and ERs
– Uganda: Survey of private gensets and electricity demand
for projection of growth (BLS)
– Latvia: When will landfill gas be used for power
generation? (MVP)
– Uganda: When does a major non-removable investment
occur in the region. (MVP)
– Brazil: Historical trends for fuel switching (BLS),
ten peers in the industry to measure emissions from
charcoal production (MVP)
How would standard-oriented
baselines work?
• Objective:
– simplify baseline determination for project developer
– reduce transaction costs and risks for investor
– control gaming
• Tool:
– public provision of pre-approved baselines for project
– not yet available
• Philosophy:
– additionality “on average”
– political decision (equity, development priorities)
– research and pilot application in concrete projects
For instance benchmarks …
• Prepared for fairly homogeneous category of projects /
technology / circumstances, a sector, power grid etc.
• Often based on activity level / efficiency
– For instance: baseline benchmark in kg coal/kWh
• Methods
historic: average energy efficiency in power sector (last five years)
present: efficiency of latest addition to grid
projection: expected technology
Country/region-specific: local circumstances, energy policies etc.
• Needs proof that
– benchmark is applicable, because project falls in project category
Has the PCF used standard baselines?
Example: Costa Rica – small scale renewables
Sector-wide analysis supports small independent power
projects (sub-projects, SP)
– Sector BLS: Develops cost criterion: System-wide long-run marginal
cost (LRMC) benchmark based on characteristics of national power
system and expansion plan
– Sector MVP: Calculates carbon intensity factor (CIF): Weighted
average carbon intensity of displaced power based on observed
dispatch behavior or least cost dispatch analysis
Simplified approach for each SP:
– SP-BLS: Generation cost > sector LRMC  SP additional
– SP-MVP: kWh supplied by SP x CIF  ERs from SP
Costa Rican Electricity Sector
Σ kWh supplied by SPs
 electricity generation replaced by SPs
 Carbon Intensity Factor (CIF)
kWh x CIF
SP 1
kWh x CIF
SP 2
kWh x CIF
SP 3
Finally: What emerges …
… is a complex picture:
– No single, but a hybrid mixture of methods
– Complexity depends on project design
– Unsolved political issues
• Baseline study and MVP must be seen together
– More or less rigorous, method-driven forecasts in the baseline
study – as a basis for
– selection and application of monitoring tools for baseline and
project emissions in the MVP
• More experience and discussion is needed!
– PCF contribution to evolutionary concept for baselines etc.
Part IV:
Validation, Verification
and Certification
Why is the MVP important?
• creates transparence, reliability, verifiability, and
– Serves as a project-specific performance standard.
– Is a performance monitoring and measurement tool.
• provides a consistent and (to be) validated system for
the flexible, yet conservative determination of ERs.
– performance criteria, observable indicators, measurement
methods, default parameters, technical equations, record
keeping systems, ER model and calculation procedures
• determines clear responsibilities for all parties.
• can be adapted to a variety of CDM projects.
What does the MVP contain?
1. Instructions and indicators for a systematic
monitoring and recording of emissions related
data for baseline and project case.
2. A models and tools for the calculation of ERs.
3. Targets and monitoring instructions for social,
environmental, and development indicators as
a measure of sustainable development.
4. Instructions for the management and quality
control of the monitoring system.
5. Guidance for the verification of ERs.
What do we mean by validation?
• An independent assessment of project design and
compliance with a set of criteria.
– Baseline/additionality/leakage
– Sustainable development
– Other criteria, e.g., stakeholder participation, environmental
impact assessment, host country approval
• Carried out by qualified (accredited) independent
private sector (operational) entity (validator).
• Successful validation is pre-requisite for project
registration by CDM Executive Board (EB).
What are validation prerequisites?
• Full project preparation
– technical, political, financial
• Project design documents
– most important: Baseline Study and MVP
• PCF Preliminary Validation Protocol (PVM)
– Validation guidelines
– Table of requirements
– Template for validation opinion
How does the
validation process work?
• Selection of independent validator by PCF
• Submission of project documents
• Review and amendment of Validation Protocol
– Revised rules and modalities?
• Validation procedure
Desk review of documents
Interviews, possibly project visit, other evidence
Input from concerned parties
Draft validation report
Clarification of issues, adjustment of project design and
documents by PCF, resubmission of documents
• Final validation report and opinion
What does project implementation
and start or ER production involve?
• Project operator implements MVP
Set up of monitoring system
Train monitoring and record keeping staff
Implement quality control system
Ready to monitor baseline and project performance data
• Initial Verification
– Qualified (accredited) independent private sector (Operational)
Entity (auditor/verifier), not project validator.
– Verifies & confirms readiness of project and quality management
and assurance system to generate and monitor ERs
– Adjustments to MVP if needed
– Establish relationship with operator
• PCF clears project for production of ERs
How is monitoring done?
• Monitoring during operation is responsibility of
project operator
• To be carried out in full compliance with MVP
• Read meters, collect and record data, undertake
surveys etc.
• Complete self-calculating spreadsheets
• Store records (paper trail)
• Report to PCF and host country authorities
• Follow quality management and assurance system
• Prepare for verification
What does verification involve?
• Periodic assessment and confirmation that project has
achieved a quantity of ERs in compliance with MVP
and relevant project criteria
• Verifier (operational entity)
– audits records, reviews interpretations, checks calculations
– reviews project performance and confirms (or determines)
achieved quantity of ERs
– reviews continued validity of baseline, if required by MVP,
– checks compliance with MVP, reviews adequacy of MVP
– assesses proper handling of management, operational and
quality assurance system
– drafts report, requires or suggests corrections, points out risks
What is certification?
• Verifier issues written assurance (the certificate)
that, during the verification period,
– the project has achieved stated ERs,
– in compliance with all CDM and project performance
• Certificate is legally binding statement, verifier is
liable for professional work.
• Executive Board (or accreditation body) can
undertake spot checks – accreditation can be
How do we receive emission
reductions? Who reports?
• Verifier informs CDM Executive Board and project
participants of successful certification and delivers
• Executive Board issues certified emission
reductions (CERs) into national registries.
• PCF Participants receive CERs in their accounts in
national registries.
• PCF and host country report periodically to
UNFCCC Secretariat and/or CDM EB.
Thank you!
What does the Kyoto Protocol say
about baselines?
The Kyoto Protocol on Baselines
• Criteria for CDM projects:
– Real, measurable, and long-term benefits related to
the mitigation of climate change. (Art. 12.5b)
– Reduction in emissions that are additional to any that
would occur in the absence of the certified project
activity. (Art. 12.5c)
• Modalities / guidelines elaborated by the
Conference of the Parties.
COP7 – defined baseline for CDM
The baseline is the scenario that:
– “reasonably represents GHG emissions that would
occur in the absence of the proposed project
– “covers emissions from all gases, sectors, sources
in Annex A within project boundary”
– is derived using an approved baseline method
How to develop CDM baselines?
(45) A baseline
shall be established:
(a) using approved and new methodologies
(b) transparent and conservative manner
(c) project-specific basis
(d) simplified procedures for small-scale
(e) national and/or sectoral policies
Select baseline method:
deemed most appropriate
guidance by Executive Board
justify choice
COP7 on CDM baseline methods
(48a) “existing actual or historical emissions” +
(46) “future emissions can rise above current levels”
(48b) “economically attractive course of action” and
“taking into account barriers to investment”
(48c) “average emissions of similar activities, in
previous 5 years, similar circumstance, top 20%
What is the CDM crediting period?
(a) Either a maximum of ten years with no option of
(b) Three seven-year renewal periods (total of 21 years).
Condition for renewal:
Original project baseline is still valid or has been
updated taking account of new data.
COP7 modalities for JI baselines
“Second (slow) - track JI”: very similar to CDM
• But no specific guidance on baseline
methodologies – except:
• A baseline shall be established
– on a project-specific basis
– or using a multi-project emission factors
• Opportunities for simplification
– Develop emissions factors, in particular for very small
and typical projects and for ESCO (energy savings)
Is “Fast-track JI” the Magic Bullet?
“First (fast) - track JI”: similar to emissions trading
• Host country must meet all requirements for emissions
trading (Art. 17), in particular inventory, registries,
compliance reserve
• Baselines are necessary but no specific methodology
• No validation (= “determination”) necessary
• Host country verifies! – and then issues ERUs
• No supervisory committee review
 Can we simply agree with host country government
on quantity of “AAU/ERUs” for a specific activity?
The relevant COP7 texts and information
on the sessions and decisions of the
CDM Executive Board are available at
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