Establishing a baseline
Baselines are established using a baseline methodology. These methodologies allow project participants to quantify the estimated emissions in the most plausible alternative scenario to implementation of the project activity (the baseline scenario). More information on creating a baseline methodology is contained in the methodologies section.
Baselines for CDM project activities must be established in accordance with the rules set out in 3/CMP.1, Annex, paragraph 45:
A baseline shall be established:
- By project participants in accordance with provisions for the use of approved and new methodologies, contained in decision 17/CP.7, the present annex and relevant decisions of the COP/MOP ;
- In a transparent and conservative manner regarding the choice of approaches, assumptions, methodologies, parameters, data sources, key factors and additionality, and taking into account uncertainty;
- On a project-specific basis;
- In the case of small-scale CDM project activities which meet the criteria specified in decision 17/CP.7 and relevant decisions by the COP/MOP, in accordance with simplified procedures developed for such activities;
- 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 (3/CMP.1, Annex, paragraph 45).
Elements (a) - (c) and (e) are discussed in detail below. For information on baseline methodologies for small-scale projects (item (d)), click here.
Using approved and new baseline methodologies
It is a requirement for validation of a project activity that:
The baseline and monitoring methodologies comply with requirements pertaining to:
- Methodologies previously approved by the Executive Board; or
- Modalities and procedures for establishing a new methodology, as set out in paragraph 38 below (3/CMP.1, Annex, paragraph 37(e)).
There are several provisions that clarify these requirements for using approved and new baseline methodologies.
Firstly, it is acceptable to argue that the most plausible baseline involves a rise in emissions levels:
The baseline may include a scenario where future anthropogenic emissions by sources are projected to rise above current levels, due to the specific circumstances of the host Party (3/CMP.1, Annex, paragraph 46).
Secondly, baselines must not be defined so as to enable CERs to be earned for decreases in emissions levels not due to the project activity:
The baseline shall be defined in a way that CERs cannot be earned for decreases in activity levels outside the project activity or due to Force Majeure (3/CMP.1, Annex, paragraph 47).
Thirdly, baselines are typically calculated ex ante, as a forecast of hypothetical future greenhouse gas emissions. Ex post calculation of baselines, that is after the period represented by the baseline has occurred, is permitted in some circumstances. The Executive Board has clarified that:
The ex post calculation of baseline emission rates may only be used if proper justification is provided. Notwithstanding, the baseline emission rates shall also be calculated ex-ante and reported in the draft CDM-PDD in order to satisfy the requirements for identification of the elements of a baseline methodology agreed by the Executive Board at its eighth meeting (EB 10, Annex 1, paragraphs 5-6).
However, when calculating baselines for CDM project activities requesting retroactive credits, the most recent (ex post) emissions data should be used, but the rules established in a methodology will override this where:
- where the methodology provides that the lower value of the ex ante and ex post must be used; and
- when the option (ex post or ex ante) is explicitly established in the methodology:
... the most recent information, corresponding to the vintage of data appropriate to the project, which is available at the validation stage shall be used for the calculation of baseline emissions. When ex ante or ex post options for the calculation of the baseline emissions are allowed, the ex post option should be selected. For cases where the methodology establishes that the lower value of ex ante and ex post must be used, the prescription of the methodology must be followed. When the option (ex ante or ex post) is explicitly established in the methodology, the prescription must be followed (EB 20, paragraph 24).
Finally, where a CDM project activity involves the replacement or retrofit of existing equipment or facilities, the Executive Board has stipulated that the baseline methodology for project activity should:
... provide a methodological approach to assess whether the existing equipment would in the absence of the CDM be replaced and, if this is the case, to reflect this in the calculation of emission reductions the replacement, retrofit or modification of the equipment in the absence of the CDM (EB 22, Annex 2, paragraph 4).
A transparent and conservative manner
The Executive Board has clarified the meaning of 'transparent and conservative' in the context of baseline methodologies. 'Transparent' means:
...that assumptions are explicitly explained and choices are substantiated (EB 5, Annex, 3, paragraph 10(a)).
'Conservative' means that:
In case of uncertainty regarding values of variables and parameters ... the resulting projection of the baseline does not lead to an overestimation of emission reductions attributable to the CDM project activity (that is, in the case of doubt, values that generate a lower baseline projection shall be used) (EB 5, Annex, 3, paragraph 10(a)).
The Executive Board has also clarified that:
When defining which emission sources should be considered in the project boundary, in the baseline scenario and in the calculation of leakage emissions, project participants should make conservative assumptions, for example the magnitude of emission sources omitted in the calculation of project emissions and leakage effects (if positive) should be equal to or less than the magnitude of emission sources omitted in the calculation of baseline emissions (EB 22, Annex 2, paragraph 11).
On a project-specific basis
In selecting a baseline methodology, project participants must choose from one of three approaches set out in 3/CMP.1, Annex, paragraph 48, and must justify their selection:
In choosing a baseline methodology for a project activity, project participants shall select from among the following approaches the one deemed most appropriate for the project activity, taking into account any guidance by the Executive Board, and justify the appropriateness of their choice:
- Existing actual or historical emissions, as applicable, or
- Emissions from a technology that represents an economically attractive course of action, taking into account barriers to investment, or
- The 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 per cent of their category (3/CMP.1, Annex, paragraph 48).
These three approaches are the only ones applicable to the selection of a baseline methodology:
The board agreed that the three approaches identified in paragraph 48 (a) to (c) are the only ones applicable to CDM project activities. It further agreed to keep under consideration, in the context of developing its guidance as provided for in paragraph 48, the issue adding additional approaches. The Meth Panel should not devote resources to develop additional approaches (EB 5, Annex 3, paragraph 7).
Particular requirements apply to projects seeking to use approach (c) above:
Project participants wishing to select this approach shall elaborate in their submission of a proposed new baseline methodology, inter alia, on:
- How they determine "similar social, economic, environmental and technological circumstances", and
- How they assess the "performance among the top 20 per cent of their category" defined as greenhouse gas emissions performance (in terms of CO2equ emissions per unit of output) (EB 8, Annex 1, paragraph 4).
In addition, project participants must:
... assess the applicability and use the most conservative of the following options:
- The output-weighted average emissions of the top 20 per cent of similar project activities undertaken in the previous five years in similar circumstances;
- The output-weighted average emissions of similar project activities undertaken in the previous five years under similar circumstances that are also in the top 20 per cent of all current operating projects in their category (i.e. in similar circumstances as defined above) (EB 8, Annex, 1, paragraph 5).
Treatment of national and/or sectoral policies
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:
- 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].
- 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:
- Sectoral mandatory regulations adopted by a local or national public authority motivated by the reduction of negative local environmental externalities and/or energy conservation and which would incidentally also reduce GHG emissions [so-called Type L- policies].
- Sectoral mandatory regulations adopted by a local or national public authority motivated by the reduction of negative local environmental externalities and which incidentally prevent the adoption/diffusion of less GHG emitting technology [so-called Type L+ policies] (EB 16, Annex 3, paragraph 1).
This guidance was revised at EB 22 and replaced with guidance that distinguished only between Type E+ and Type E- policies (EB 22, Annex 3, paragraph 3). No further mention has been made by the Executive Board of Type L+ and Type L- 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.
The Executive Board have requested the secretariat to prepare draft guidelines in relation to the application of E+/E- policies in the assessment of additionality, for its consideration at EB54.
At its 55th meeting, the Executive Board considered draft 'Guidelines on the treatment of national and sectoral policies in the demonstration and assessment of additionality', and agreed not to continue the consideration of such guidelines. The Board also agreed that the possible impact of national and sectoral policies in the demonstration and assessment of additionality shall be assessed on a case-by-case basis (EB 55, paragraph 27).
Renewal of crediting period
When the crediting period of a CDM project activity is renewed, the current baseline must be reassessed to ensure that it is valid and if necessary updated. This process is governed by the methodological tool, Assessment of the validity of the original/current baseline and update of the baseline at the renewal of the crediting period, which was updated at EB 66.
The tool consists of two steps. The first step provides an approach to evaluate whether the current baseline is still valid for the next crediting period. The second step provides an approach to update the baseline in case the current baseline is no longer valid.
Step 1: Assessing the validity of the current baseline for the next crediting period
First, the current baseline's compliance with relevant mandatory national and/or sectoral policies must be assessed. This involves ensuring that the current baseline remains valid in light of any changes to national and/or sectoral policies since validation or the last request for renewal. If not in compliance, then the baseline must be updated unless it can be shown that the updated policies are systematically not enforced and that non-compliance is widespread.
Secondly, the impact of any changes in circumstances must be assessed by evaluating whether the conditions used to determine the baseline emissions in the previous crediting period are still valid. This involves the assessment of the availability of new fuels or raw materials and the impact of electricity or fuel prices in the identification of the current practice for the baseline emissions. If the new circumstances make the continued validity of the current baseline not plausible, then the current baseline needs to be updated for the subsequent crediting period.
Thirdly, assess whether the data and parameters that were determined at the start of the crediting period and not monitored during the crediting period are still valid or whether they should be updated. If no longer valid, the current baseline will require updating.
Step 2: Update the current baseline and the data and parameters
Step two is only required if it is found that the current baseline is no longer valid. The current baseline emissions for the subsequent crediting period should be updated, without reassessing the baseline scenario, based on the latest approved version of the methodology applicable to the project activity.