If a law or policy requires a project activity to be implemented, can it still be registered under the CDM?

The Executive Board has clarified that in general:

A baseline scenario shall be established taking into account 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 (EB 22, Annex 3, paragraph 4).

However, only mandatory laws and regulations need to be taken into account, so national and local policies that do not have legally-binding status can be ignored:

The alternative(s) shall be in compliance with all mandatory applicable legal and regulatory requirements, even if these laws and regulations have objectives other than GHG reductions, e.g. to mitigate local air pollution (EB 29, Annex 5).

In addition, the Executive Board has created exceptions for the following types of mandatory national and/or sectoral policies:

  1. National and/or sectoral policies or regulations that give comparative advantages to more emissions-intensive technologies or fuels over less emissions-intensive technologies or fuels [so-called Type E+ policies].
  2. National and/or sectoral policies or regulations that give comparative advantages to less emissions-intensive technologies over more emissions-intensive technologies (e.g. public subsidies to promote the diffusion of renewable energy or to finance energy efficiency programs) [so-called Type E- policies] (EB 22, Annex 3, paragraph 6).

At EB 16, the Executive Board had originally identified two other types of national and/or sectoral policies (Type L+ and Type L-), but this guidance was replaced at EB 22 with guidance that distinguished only between Type E+ and Type E- policies.

For Type E+ policies, the Executive Board has confirmed that only those policies implemented before 11 December 1997 can be taken into account when developing the baseline scenario:

Only national and/or sectoral policies or regulations under paragraph 6 (a) that have been implemented before adoption of the Kyoto Protocol by the COP (decision 1/CP.3, 11 December 1997) shall be taken into account when developing a baseline scenario. If such national and/or sectoral policies were implemented since the adoption of the Kyoto Protocol, the baseline scenario should refer to a hypothetical situation without the national and/or sectoral policies or regulations being in place. (EB 22, Annex 3, paragraph 7(a)).

For Type E- policies, the Executive Board has confirmed that only those policies implemented before 11 November 2001 need to be taken into account when developing the baseline scenario:

National and/or sectoral policies or regulations under paragraph 6 (b) that have been implemented since the adoption by the COP of the CDM M&P (decision 17/CP.7, 11 November 2001) need not be taken into account in developing a baseline scenario (i.e. the baseline scenario could refer to a hypothetical situation without the national and/or sectoral policies or regulations being in place) (EB 22, Annex 3, paragraph 7(b)).

The objective of these policies was described as follows:

As a general principle, national and/or sectoral policies and circumstances are to be taken into account on the establishment of a baseline scenario, without creating perverse incentives that may impact host Parties' contributions to the ultimate objective of the Convention (EB 22, Annex 3, paragraph 5).

Finally, where analysis shows that there is widespread non-compliance in a country or region with mandatory laws and policies, then a scenario involving non-compliance may be a valid baseline:

If an alternative does not comply with all mandatory applicable legislation and regulations, then show that, based on an examination of current practice in the country or region in which the law or regulation applies, those applicable legal or regulatory requirements are systematically not enforced and that non-compliance with those requirements is widespread in the country. If this cannot be shown, then eliminate the alternative from further consideration (EB 29, Annex 5).

In the case of one approved baseline methodology, AM0012, the Executive Board found that while monitored compliance with a particular national policy was less than 50%, it could not be said that the policy was enforced. Once monitored compliance exceeded 50%, however, the assumption that the policy is not enforced would no longer be tenable. The baseline scenario in that case was identified as a gradual improvement of compliance with the policy.