Establishing additionality - the A/R additionality tool
The Executive Board has established the Tool for the demonstration and assessment of additionality in A/R CDM project activities (the A/R additionality tool) as a general framework for project participants to assess additionality in afforestation and reforestation (A/R) projects.
The latest version of the A/R additionality tool (Version 02), was adopted at EB 35, Annex 17. This version replaces EB 21, Annex 16 (Version 01).
Use of the tool is not obligatory:
Project participants proposing new baseline methodologies may incorporate this tool in their proposal. Project participants may also propose other approaches for the demonstration of additionality to the Executive Board for its consideration (EB 35, Annex 17, paragraph 2).
However, when reference is made in approved methodologies to the use of the A/R additionality tool, this means that the tool is part of the methodology and must be used (EB 21, paragraph 17).
The tool is aplicable only where forestation of the project site would not be illegal and the baseline methodology calls for a stepwise approach to establishing additionality, and only for large-scale A/R projects:
The tool is applicable under the following conditions:
- Forestation of the land within the proposed project boundary performed with or without being registered as the A/R CDM project activity shall not lead to violation of any applicable
law even if the law is not enforced;
- The use of this tool to determine additionality requires the baseline methodology to provide for a stepwise approach justifying the determination of the most plausible baseline scenario.
Project participants proposing new baseline methodologies shall ensure consistency between the determination of a baseline scenario and the determination of additionality of a project
- This tool is not applicable to small - scale afforestation and reforestation project activities (EB 35, Annex 17, paragraph 4).
The additionality tool sets out the following steps to demonstrate and assess additionality:
- Step 0: Preliminary screening based on the starting date of the A/R project activity;
- Step 1: Identification of alternative land use scenarios to the A/R project activity;
- Step 2: Investment analysis to determine that the proposed project activity is not the most
economically or financially attractive of the identified land use scenarios; or
- Step 3: Barriers analysis; and
- Step 4: Common practice analysis.
The diagram below describes the operation of the additionality tool (EB 35, Annex 17).
Step 0: Preliminary screening
Step 0 involves a screening based on the start date of the project activity:
If project participants claim that the afforestation or reforestation CDM project activity has a starting date after 31 December 1999 but before the date of its registration, then the project participants shall:
- Provide evidence that the starting date of the A/R CDM project activity was after 31 December 1999; and
- Provide evidence that the incentive from the planned sale of CERs was seriously considered in the decision to proceed with the project activity. This evidence shall be based on (preferably official, legal and/or other corporate) documentation that was available to third parties at, or prior to, the start of the project activity (EB 35, Annex 17, paragraph 7).
Step 1: Identification of alternative land use scenarios to the proposed A/R CDM project activity
Step 1 requires the identification of realistic and credible alternative scenarios that would have occurred in the absence of the A/R project:
Identify realistic and credible land-use scenarios that would have occurred on the land within the proposed project boundary in the absence of the afforestation or reforestation project activity under the CDM. The scenarios should be feasible for the project participants or similar project developers taking into account relevant national and/or sectoral policies7 and circumstances, such as historical land uses, practices and economic trends (EB 35, Annex 17, paragraph 9).
Certain land use scenarios must be considered:
The identified land use scenarios shall at least include:
- Continuation of the pre-project land use;
- Afforestation / reforestation of the land within the project boundary performed without being registered as the A/R CDM project activity;
- If applicable, forestation of at least a part of the land within the project boundary of the proposed A/R CDM project at a rate resulting from:
- Legal requirements; or
- Extrapolation of observed forestation activities in the geographical area with similar socioeconomic and ecological conditions to the proposed A/R CDM project activity occurring in a period since 31 December 1989, as selected by the PP (EB 35, Annex 17, paragraph 9).
To identify these scenarios, land use records, field surveys, data and feedback from stakeholders, and information from other appropriate sources may be used as appropriate (EB 35, Annex 17, paragraph 10).
All identified scenarios must be credible, and credibility must be justified:
All identified land use scenarios must be credible. All land-uses within the boundary of the proposed A/R CDM project activity that are currently existing or that existed at some time since 31 December 1989 but no longer exist, may be deemed realistic and credible. For all other land use scenarios, credibility shall be justified10. The ustification shall include elements of spatial planning information (if applicable) or legal requirements and may include assessment of economical feasibility of the proposed land use scenario (EB 35, Annex 17, paragraph 11).
The alternative scenarios must involve compliance with mandatory laws and regulations, unless there is widespread non-compliance (i.e. prevalent on at least 30% of area of the smallest administrative unit that encompasses the project area). Scenarios that do not meet these criteria should be eliminated (EB 35, Annex 17, paragraph 12).
The result of this step is a list of plausible alternative land-use scenarios that are in compliance with mandatory, enforced laws or policies. If this list contains no alternative scenarios, or only one alternative, the project is not additional (EB 35, Annex 17, paragraph 12).
It should be noted that this paragraph (quoted above) may contain an error. It is likely that the Executive Board intended that a project not be additional if it is the only plausible land-use scenario, not that there is only a single alternative to implementation of the project.
Project proponents must then proceed to either Step 2 (Investment Analysis) or Step 3 (Barrier Analysis).
Step 2: Investment analysis
Step 2 requires project participants to determine whether which is more financially attractive:
- The project activity, without the sale of temporary certified emission reductions (tCERs) or long term certified emission reductions (CERs); or
- At least one other land use scenario.
If implementation of the project activity without the sale of tCERs and lCERs is the most financially attractive course of action, the project will not be additional:
Determine whether the proposed project activity, without the revenue from the sale of temporary CERs (tCERs) or long-term CERs (lCERs), is economically or financially less attractive than at least one of the other land use scenarios. Investment analysis may be performed as a stand-alone additionality analysis or in connection to the Barrier analysis (Step 3) (EB 35, Annex 17, paragraph 14).
Sub-step 2(a) involves determining which analysis method to apply:
Determine whether to apply simple cost analysis, investment comparison analysis or benchmark analysis (sub-step 2b). If the A/R CDM project activity generates no financial or economic benefits other than CDM related income, then apply the simple cost analysis (Option I). Otherwise, use the investment comparison analysis (Option II) or the benchmark analysis (Option III). Note, that Options I, II and III are mutually exclusive hence, only one of them can be applied (EB 35, Annex 17, paragraph 15).
The chosen method must then be applied, as described in sub-step 2(b). If the simple cost analysis is chosen:
Document the costs associated with the A/R CDM project activity and demonstrate that the activity produces no financial benefits other than CDM related income (EB 35, Annex 17, paragraph 16).
This is done by undertaking the following analysis:
If the land within the boundary of the proposed of the A/R CDM project activity was at least partially forested since 31 December 1989 and the land is not a forest at the project start, the project participants shall identify incentives/reasons/actions that allowed for the past forestation and demonstrate that the current legal/financial or other applicable regulations or socio-economical or ecological or other local conditions have changed to an extent that justifies the conclusion that the activity produces no financial benefits other than CDM related income (EB 35, Annex 17, paragraph 17).
If the simple cost analysis shows that the proposed activity produces no financial benefits other than CDM-related income, proponents should proceed to Step 4:
If it is concluded that the proposed A/R CDM project activity produces no financial benefits other than CDM related income then proceed to Step 4 (Common practice analysis) (EB 35, Annex 17, paragraph 17).
If the investment comparison analysis is chosen:
Identify the financial indicator, such as IRR13, NPV, payback period, cost benefit ratio most suitable for the project type and decision-making context (EB 35, Annex 17).
If the benchmark analysis is chosen:
Identify the financial indicator, such as IRR14, NPV, payback period, cost benefit ratio, or other (e.g. required rate of return (RRR) related to investments in agriculture or forestry, bank deposit interest rate corrected for risk inherent to the project or the opportunity costs of land, such as any expected income from land speculation) most suitable for the project type and decision context. Identify the relevant benchmark value, such as the required rate of return (RRR) on equity. The benchmark is to represent standard returns in the market, considering the specific risk of the project type, but not linked to the subjective profitability expectation or risk profile of a particular project developer (EB 35, Annex 17, paragraph 18).
Benchmarks can be derived from a number of sources:
Benchmarks can be derived from:
- Government bond rates, increased by a suitable risk premium to reflect private investment and/or the project type, as substantiated by an independent (financial) expert;
- Estimates of the cost of financing and required return on capital (e.g. commercial lending rates and guarantees required for the country and the type of project activity concerned), based on bankers views and private equity investors/funds’ required return on comparable projects;
- A company internal benchmark (weighted average capital cost of the company) if there is only one potential project developer (e.g. when the proposed project land is owned or otherwise controlled by a single entity, physical person or a company, who is also the project developer). The project developers shall demonstrate that this benchmark has been consistently used in the past, i.e. that project activities under similar conditions developed by the same company used the same benchmark (EB 35, Annex 17, paragraph 19).
Sub-step 2(c) (undertaken only for investment comparison analysis and benchmark analysis) involves the calculation and comparison of financial indicators. Participants must include the following:
Calculate the suitable financial indicator for the proposed A/R CDM project activity without the financial benefits from the CDM and, in the case of Option II above, for the other land use scenarios. Include all relevant costs (including, for example, the investment cost, the operations and maintenance costs), and revenues (excluding tCER or lCERs revenues, but including subsidies/fiscal incentives where applicable), and, as appropriate, non-market cost and benefits in the case of public investors (EB 35, Annex 17, paragraph 20).
If investment comparison analysis is used:
- If the implementation of project activity without CDM registration has less favourable financial indicators than at least one alternative scenario, then implementation is not the most financially attractive scenario. A sensitivity analysis must be conducted.
- If implementation of the project without CDM registration has the most favourable financial indicators, then the project is not additional.
If benchmark analysis is used:
- If the implementation of project activity without CDM registration has a less favourable indicator (e.g. lower IRR) than the benchmark, then implementation is not the most financially attractive scenario. A sensitivity analysis must be conducted.
- If implementation of the project without CDM registration has the most favourable financial indicators, then the project is not additional.
Sub-step 2(d) requires a sensitivity analysis:
... that shows whether the conclusion regarding the financial attractiveness is robust to reasonable variations in the critical assumptions. The investment analysis provides a valid argument in favour of additionality only if it consistently supports (for a realistic range of assumptions) the conclusion that the proposed A/R CDM project activity without the financial benefits from the CDM is unlikely to be financially attractive (EB 35, Annex 17, paragraph 24).
Therefore, a project activity will only satisfy the requirements of step 2 (investment analysis) if it can be shown that implementation of the project would not be the most financially attractive option in any case.
The critical assumptions relate to the following:
If the land within the boundary of the proposed A/R CDM project activity was at least partially forested since 31 December 1989 and the land is not a forest at the project start, the project participants shall demonstrate that incentives/reasons/actions that allowed for the past forestation have changed to an extent that affects the financial attractiveness of forestation of the project area without being registered as the A/R CDM project (EB 35, Annex 17, paragraph 25).
If the requirements of this step are satisfied, there is no need to conduct a barrier analysis (Step 3) and proponents can proceed directly to the common practice analysis (Step 4). However, if the investment analysis indicates that from a financial perspective, the project would have been carried out in any case, then further barriers must be identified under step 3 for the project activity to be considered additional.
At EB 51, the Executive Board adopted version 3 of the Guidance on the assessment of investment analysis to provide project participants and DOEs with guidance on the preparation, presentation and validation of investment analyses (EB 51, paragraph 77).
Step 3: Barrier analysis
Step 3 involves determining whether the proposed project activity faces barriers that:
- prevent the implementation of this type of proposed project activity; and
- do not prevent the implementation of at least one of the alternative land use scenarios (EB 35, Annex 17, paragraph 26).
In order for a project activity to meet the requirements of this step, these barriers must prevent the project from being implemented unless it is registered under the CDM:
Establish that there are barriers that would prevent the implementation of the type of proposed project activity from being carried out if the project activity was not registered as an A/R CDM activity. The barriers should not be specific to the project participants (EB 35, Annex 17, paragraph 28).
These barriers may include:
- Investment barriers, for example:
- similar activities (i.e. those of a similar scale, and taking place in a comparable regulatory environment) have only been implemented with grants or other non-commercial finance terms;
- Debt funding is not available for this type of project activity;
- No access to international capital markets due to real or perceived risks associated with domestic or foreign direct investment in the country where the project activity is to be implemented, as demonstrated by the credit rating of the country or other country investment reports of reputed origin;
- Lack of access to credit;or
- Institutional barriers - for example:
- risk related to changes in government policies or laws;
- lack of enforcement of forest or land-use-related legislation;
- Technological barriers - for example, that:
- lack of access to planting materials;
- lack of infrastructure for implementation of the technology;
- Barriers related to local tradition, such as:
- Traditional knowledge or lack thereof, laws and customs, market conditions and practices;
- Traditional equipment and technology.
- Prevailing practice barriers - for example, that the project activity is the 'first of its kind';
- Barriers due to local ecological conditions, such as:
- Degraded soil (e.g. water/wind erosion, salination, etc.);
- Catastrophic natural and / or human-induced events (e.g. land slides, fire, etc);
- Unfavourable meteorological conditions (e.g. early/late frost, drought);
- Pervasive opportunistic species preventing land use (e.g. grasses, weeds);
- Unfavourable course of ecological succession;
- Biotic pressure in terms of grazing, fodder collection, etc.
- Barriers due to social conditions, such as:
- Demographic pressure on the land (e.g. increased demand on land due to population growth);
- Social conflict among interest groups in the region where the project takes place;
- Widespread illegal practices (e.g. illegal grazing, non-timber product extraction and tree felling);
- Lack of skilled and/or properly trained labour force;
- Lack of organisation of local communities.
- Lack of organisation of social communities;
- Barriers relating to land tenure, ownership, inheritance, and property rights, inter alia:
- Communal land ownership with a hierarchy of rights for different stakeholders limits the incentives to undertake the land-use scenarios;
- Lack of suitable land tenure legislation and regulation to support the security of tenure;
- Absence of clearly defined and regulated property rights in relation to natural resource products and services;
- Formal and informal tenure systems that increase the risks of fragmentation of land holdings;
- Barriers relating to markets, transport and storage;
- Unregulated and informal markets for products and services prevent the transmission of effective information to project participants;
- Remoteness of land area and undeveloped road and infrastructure incur large transportation expenditures, thus eroding the competitiveness and profitability of products from the land use;
- Possibilities of large price risk due to the fluctuations in the prices products over the project period in the absence of efficient markets and insurance mechanisms;
- Absence of facilities to convert, store and add value to products resulting from land use limits the possibilities to capture rents from the land use scenario (EB 35, Annex 19).
In order to demonstrate additionality, the identified barriers must be shown to prevent potential project participants from implementing the project without CDM registration:
The identified barriers are only sufficient grounds for demonstration of additionality if they would prevent potential project participants from carrying out the proposed project activity if it was not expected to be registered as an A/R CDM project activity (EB 35, Annex 17, paragraph 29).
Evidence must be provided of the existence of these barriers. Anecdotal evidence is allowed, but it is not sufficient:
The type of evidence to be provided may include:
- Relevant legislation, regulatory information or environmental/natural resource management norms, acts or rules;
- Relevant (sectoral) studies or surveys (e.g. market surveys, technology studies, etc) undertaken by universities, research institutions, associations, companies,
bilateral/multilateral institutions, etc;
- Relevant statistical data from national or international statistics;
- Documentation of relevant market data (e.g. market prices, tariffs, rules);
- Written documentation from the company or institution developing or implementing the A/R CDM project activity or the A/R CDM project developer, such as minutes from Board
meetings, correspondence, feasibility studies, financial or budgetary information, etc;
- Documents prepared by the project developer, contractors or project partners in the context of the proposed project activity or similar previous project implementations;
- Written documentation of independent expert judgements from agriculture, forestry and other land-use related Government / Non-Government bodies or individual experts,
educational institutions (e.g. universities, technical schools, training centres), professional associations and others) (EB 35, Annex 17, paragraph 30).
If the land bas been partially forested since 31 December 1989, project proponents must identify why this forestation cannot continue:
If the land within the boundary of the proposed of the A/R CDM project activity was at least partially forested since 31 December 1989 and the land is not a forest at the project start, the project participants shall identify, incentives/reasons/actions/that allowed for the past forestation and shall demonstrate that the current legal/financial or other applicable regulations or ecological or other local conditions have changed to the extent that they pose a barrier which allows for conclusion that repetition of the forestation performed without being registered as the A/R CDM project activity is not possible (EB 35, Annex 17, paragraph 31).
Sub-step 3(b) involves demonstrating that the identified barriers, which would prevent implementation of the proposed project activity, would not also prevent the implementation of all alternatives identified in step 1:
If the identified barriers also affect other land use scenarios, explain how they are affected less strongly than they affect the proposed A/R CDM project activity. In other words, explain how the identified barriers are not preventing the implementation of at least one of the alternative land use scenarios. Any land use scenario that would be prevented by the barriers identified in Sub-step 3a is not a viable alternative, and shall be eliminated from consideration. At least one viable land use scenario shall be identified (EB 35, Annex 17, paragraph 32).
If Step 3 is satisfied (i.e. there exists a barrier to the implementation of the project activity, which affects implementation of the project more than alternative scenarios), proponents should proceed to Step 4 (common practice analysis). If Step 3 is not satisfied, the project is not additional.
Step 4: Common practice analysis
Step 4 complements steps 1, 2 and 3 (as applicable) with an analysis of the extent to which similar forestation activities have already diffused in the relevant geographical area. This step is a credibility check, in that if similar activities are widely observed and commonly carried out, it calls into question the claim that the proposed project activity is financially unattractive or faces barriers.
Project proponents must analyse activities similar to the proposed project activity to describe whether and to which extent similar activities have already been implemented in the region.
Proponents must then discuss any similar options that are occurring, and identify 'essential distinctions' between these and the project activity:
If forestation activities similar to the proposed A/R CDM project activity are identified, then compare the proposed project activity to the other similar forestation activities and assess whether there are essential distinctions between them. Essential distinctions may include a fundamental and verifiable change in circumstances under which the proposed A/R CDM project activity will be implemented when compared to circumstances under which similar forestations were carried out. For example, barriers may exist, or promotional policies may have ended. If certain benefits rendered the similar forestation activities financially attractive (e.g., subsidies or other financial flows), explain why the proposed A/R CDM project activity cannot use the benefits. If applicable, explain why the similar forestation activities did not face barriers to which the proposed A/R CDM project activity is subject (EB 35, Annex 17, paragraph 34).
If similar activities cannot be observed, or similar activities can be observed but the essential distinctions can be reasonably explained, then the proposed project activity is additional.