Clean Development Mechanism (CDM) and Baseline-Assessments for Wind Energy Projects

The Clean Development Mechanism

In the Kyoto Protocol the industrialised countries committed themselves to binding reduction targets for greenhouse gases (GHG). In order to enable these countries to fulfil their commitment in a cost-efficient way, three flexible mechanisms - Emissions Trading (ET), Joint Implementation (JI) and Clean Development Mechanism (CDM) - were developed. ET is a trade-based mechanism allowing states to buy or sell emissions rights, JI and CDM are project-based mechanisms allowing the generation of emission reductions, which are attributable to the domestic target, by investing in projects abroad.

Under the CDM, an Annex I country invests in an emission-reducing project in a Non-Annex I country. These countries are also referred to as „investor country“ and „host country“. The emission reductions - the so-called certified emission reductions (CERs) - can be gained from 2000 onwards, and will be issued retrospectively as soon as the rules have been fixed and the Kyoto Protocol has come into force.

CDM requirements

For the CDM two sets of requirements exist: requirements for the participation in the mechanism in general (relating to states) and requirements for the projects (relating to the design of projects).

Regarding participation, host countries have to have ratified the Kyoto Protocol. Apart from the ratification, the investor countries have to fulfil a set of requirements relating to the estimation and reporting of domestic emissions and the booking of emission rights and certificates into a national registry.

Regarding the requirements of projects, as a technological restriction the CDM does not allow the usage of nuclear facilities. But CDM projects also have to fulfil additional requirements:

• Existing official development assistance resources must not be diverted for project financing; other public funding used for this purpose is to be separate from and not counted towards the financial obligations of the industrialised countries.
  
• Sustainable development: projects shall promote sustainable development in the host country. The respective requirements are specified and applied by the host country. In case of approval, the project participants are provided with a so called „letter of approval“ by the host country.
  
• Additionality: the emission reductions resulting from the project are to be additional to reductions which would have occurred otherwise. This requirement is checked by comparing the project emissions with the emissions of a hypothetical reference case (the "baseline") – this reference case is used to simulate the situation without the project. So determining the additionality of a project mainly depends on the choice and calculation of the baseline.
  

CDM project cycle

Projects wanting to qualify as CDM projects have to undergo the following project cycle:

A) Project Design: The project participants (the investor and the organisation carrying out the project) draw up a so-called project design document (PDD). An outline for such a document has already been developed by the UNFCCC.

The PDD contains 

• a general as well as a technical description of the project
• the construction of the baseline and calculation of baseline emissions
• the information needed to assess the fulfilment of the CDM project requirements
• a plan for the monitoring of the project emissions
• the calculation of the project emissions.

In order to gain information about the sustainability of the project, the following activities have to be conducted:

• analysis of the environmental impacts of the project 
• invitation of stakeholders’ comments. Based on the PDD, the project participants apply for the "letter of approval", to have the project recognised as a CDM project by the government of the host country. The host countries may then give their approval that the activity satisfies their sustainable development requirements.

B) Validation: the next step is the validation of the project by an appointed "Operational Entity“ (OE), which evaluates the project using the project design document with regard to the CDM criteria. OE are independent bodies which have been accredited by the "Executive Board" (EB). The EB is the central authority for the CDM, it is responsible for monitoring the CDM. It consists of 10 members (6 non-Annex I: 4 Annex-I parties) from parties to the Kyoto Protocol.

C) Registration: after a project has been validated, the documents are passed on to the EB for registration - i.e. formal acceptance as a CDM project.

D) Monitoring: subsequently, monitoring takes place. This is a task for the project participants. The verification, which takes place at regular intervals, is also conducted by an OE (different from the OE which conducted validation) which checks the accuracy of the estimated CERs ex-post. The certification involves the written assurance of the OE that the project has resulted in the verified emission reductions within a certain period. The certification report actually represents an application for the issuing of emission credits to the amount of the verified emission reductions. The EB issues the CERs, unless there is an application submitted by a third party within a certain time to re-examine the CDM project. When issued, the CERs are individually marked with a serial number, the Share of Proceeds is deducted and the remaining CERs credited to the account/s of the project participants. The CERs rewarded for a project can then be used to fulfil an emission reduction commitment or can be sold to other countries with a commitment

CDM project cycle

Calculation of emission reductions

The assumption of a baseline - the amount of anthropogenic emissions which would occur if the project did not take place - is of crucial significance for the amount of credits a CDM project can generate. The amount of CERs issued for a project equals the difference between the actual emissions and the baseline. Three basic approaches are eligible for the construction of the baseline.

The most appropriate approach is to be chosen and this choice has to be explained and justified. The following approaches were developed:

• current or historical emissions,
• emissions of a technology which represents an economically attractive course of action, taking barriers to investment into account,
• average emissions of similar project activities undertaken in the previous five years, in similar social, economic, environmental and technological circumstances, and whose performance is among the top 20 percent of their category.

More detailed methodologies for the construction of the baseline are to be developed by the Executive Board in the future.

Projects can generate CERs only for a specified period, the crediting period. Participants can choose between two approaches for the crediting period:

• either a maximum of seven years which may be renewed twice at most. For each renewal an operational entity has to determine whether the baseline is still valid
• or a maximum of ten years with no option of renewal.

In order to promote small projects, simplified regulations regarding baseline construction and monitoring are applied for the following project categories:

• renewable energy project activities with a maximum output capacity of up to 15 MW,
• energy efficiency improvement project activities which reduce energy consumption, on the supply and / or demand side by up to 15 GWh per year,
• other project activities that both reduce anthropogenic emissions by sources and that directly emit less than 15 kilotonnes of carbon dioxide equivalent annually.

The simplified regulations will be worked out by the Executive Board.

When calculating the project emissions, a project boundary has to be defined, which encompasses all GHG emissions which are significant and reasonably attributable to the project and are under the control of the project participants.

If projects lead to a net change of emissions occurring outside the project boundary, this is referred to as leakage. The calculation of emission reductions incurred by the project has to be adjusted accordingly. The emission reductions attributed to a project are then calculated as follows: