Establishing additionality - the additionality tool
The Executive Board has established the Tool for the demonstration and assessment of additionality (the additionality tool) as a general framework for project proponents to assess additionality. The additionality tool is applicable to a wide range of project types.
The additionality tool is not mandatory for project proponents when proposing a new methodology. Project proponents are able to propose alternative methods to demonstrate additionality for the Executive Board to consider. However, once the additionality tool is included in an approved methodology, its application becomes mandatory for project proponents using that methodology.
The additionality tool sets out the following steps to demonstrate and assess additionality:
Step 0: Demonstration whether the proposed project activity is the first-of-its-kind;
Step 1: Identification of alternatives to the project activity;
Step 2: Investment analysis to determine that the proposed project activity is either (a) not the most economically or financially attractive or (b) not economically or financially feasible;
Step 3: Barrier analysis; and
Step 4: Common practice analysis.
Using the additionality tool does not remove the need to establish a baseline, and the baseline scenario and additionality calculations must be consistent:
This tool does not replace the need for the baseline methodology to provide a step-wise approach to identify the baseline scenario. Project participants that propose new baseline methodologies shall ensure consistency between the determination of additionality of a project activity and the determination of a baseline scenario. (EB 70, Annex 8, paragraph 5)
The diagram below describes the operation of the additionality tool. Each of the steps is discussed in more detail below.
Step 0: Demonstration of whether the proposed project activity is the first-of-its-kind
This preliminary step in the additionality tool is optional and is one method through which additionality can be demonstrated for a CDM project activity. If it is not applied then it will be assumed that the CDM project activity is not the first-of-its-kind, though it may still be additional.
If a proposed CDM project activity is the first-of-its-kind then it is additional (EB 69, Annex 7, paragraph 6).
If the project activity applies measures that are listed in the categories above, then the Guidelines on additionality of first-of-its-kind project activities shall be applied to demonstrate that a project is first-of-its-kind.
If the CDM project activity(ies) involves measures other than those identified above, the project proponents shall propose a approach for demonstrating that a project is first-of-its-kind. (EB 70, Annex 8, paragraph 14-18)
If the proposed CDM project activity is first-of-its-kind then it is additional and no further steps are required. Otherwise proceed to step 1.
Step 1: Identification of alternatives to the project activity consistent with current laws and regulations
Step 1 involves two sub-steps. Sub-step 1(a) is directed towards the identification of realistic and credible alternatives to the project scenario. In particular, project proponents are required to identify:
realistic and credible alternative(s) available to the Project Participants or similar project developers that provide outputs or services comparable with the proposed CDM project activity. These alternatives are to include:
(a) The proposed project activity undertaken without being registered as a CDM project activity;
(b) Other realistic and credible alternative scenario(s) to the proposed CDM project activity scenario that deliver outputs and on services (e.g. electricity, heat or cement) with comparable quality, properties and application areas, taking into account, where relevant, examples of scenarios identified in the underlying methodology;
(c) If applicable, continuation of the current situation (no project activity or other alternatives undertaken). (EB 70, Annex 8, paragraph 20)
If the proposed CDM project activity includes several different facilities, technologies, outputs or services, alternative scenarios for each of them should be identified separately. Realistic combinations of these should be considered as possible alternative scenarios to the proposed CDM project activity.
For the purpose of identifying relevant alternative scenarios, the project proponents should include the technologies or practices that provide outputs (e.g. cement) or services (e.g. electricity, heat) with comparable quality, properties and application areas as the proposed CDM project activity and that have been implemented previously or are currently being introduced in the relevant country/region (EB 70, Annex 8, paragraph 22).
Sub-step 1(b) is directed towards ensuring compliance with all mandatory laws and regulations. This sub-step does not consider national and local policies that do not have legally-binding status. Sub-step 1(b) requires that:
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 70, Annex 8. paragraph 24)
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 is a valid one which may be considered:
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 70, Annex 8, paragraph 25)
However, if the only way to comply with mandatory laws or regulations is to implement the proposed project activity, then the activity will not be considered additional:
If the proposed project activity is the only alternative amongst the ones considered by the Project Participants that is in compliance with mandatory regulations with which there is general compliance, then the proposed CDM project activity is not additional. (EB 70, Annex 8, paragraph 26)
Step 2: Investment analysis
Step 2 involves determining whether the proposed project activity without the revenue from the sale of certified emission reductions (CERs) is either (a) not the most economically or financially attractive or (b) not economically or financially feasible. Undertaking the investment analysis involves several sub-steps.
Sub-step 2(a) involves determining which analysis method to apply. The project proponent is to determine whether to apply a simple cost analysis, investment comparison analysis or benchmark analysis. If the project activity and the alternatives identified in Step 1 generate no financial or economic benefits other than CDM related income, then apply the simple cost analysis (Option I). Otherwise the investment comparison analysis (Option II) or the benchmark analysis (Option III) should be used (EB 70 Annex 8, paragraph 32).
Sub-step 2(b) involves applying the chosen method. If the simple cost analysis is chosen:
Document the costs associated with the CDM project activity and demonstrate that there is at least one alternative which is less costly than the project activity. (EB 70, Annex 8, paragraph 33)
If the investment comparison analysis is chosen:
Identify the financial indicator, such as IRR, NPV, cost benefit ratio, or unit cost of service (e.g. levelized cost of electricity production in $/kWh or levelized cost of delivered heat in $/GJ) most suitable for the project type and decision-making context. (EB 70, Annex 8, paragraph 35)
If the benchmark analysis is chosen:
Identify the financial/economic indicator, such as IRR, most suitable for the project type and decision context. (EB 70, Annex 8, paragraph 36)
When applying Option II or Option III the financial/economic analysis shall be based on parameters that are standard in the market, considering the specific characteristics of the project type, but not linked to the subjective profitability expectation or risk profile of a particular project developer. Only in the particular case where the project activity can be implemented by the project proponent, the specific financial/economic situation of the company undertaking the project activity can be considered (EB 70, Annex 8, paragraph 37).
Sup-step 2(c) involves calculating and comparing the financial indicators of the proposed project activity and the alternatives identified in Options II and III:
Calculate the suitable financial indicator for the proposed CDM project activity and, in the case of Option II above, for the other alternatives. Include all relevant costs (including, for example, the investment cost, the operations and maintenance costs), and revenues (excluding CER revenues, but possibly including inter alia subsidies/fiscal incentives, ODA, etc., where applicable), and, as appropriate, non-market cost and benefits in the case of public investors if this is standard practice for the selection of public investments in the host country. (EB 70, Annex 8, paragraph 39)
The investment analysis should be presented in a clear and transparent manner in the PDD (or in separate annexes).
Sub-step 2(d) requires a sensitivity analysis if the investment comparison or benchmark analysis is chosen:
that shows whether the conclusion regarding the financial/economic 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 project activity is unlikely to be the most financially/economically attractive (as per Step 2c) or is unlikely to be financially/economically attractive (as per Step 2c). (EB 70, Annex 8, paragraph 43)
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/economically attractive option in any case.
If the requirements of this step are satisfied, there is no need to conduct a barrier analysis (step 3). 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 62, the Executive Board adopted version 5 of the Guidance on the assessment of investment analysis to provide project proponents and DOEs with guidance on the preparation, presentation and validation of investment analyses.
Step 3: Barrier analysis
Step 3 involves determining whether the proposed project activity faces barriers that:
a. prevent the implementation of this type of proposed project activity; and
b. do not prevent the implementation of at least one of the alternatives. (EB 70, Annex 8, paragraph 47)
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:
The identified barriers are only sufficient grounds for demonstration of additionality if they would prevent potential project proponents from carrying out the proposed project activity undertaken without being registered as a CDM project activity. (EB 70, Annex 8, paragraph 48)
Sub-step 3(a) involves establishing that:
there are realistic and credible barriers that would prevent the implementation of the proposed project activity from being carried out if the project activity was not registered as a CDM activity. (EB 70, Annex 8, paragraph 51)
These barriers may include:
a) Investment barriers - for example, that:
i) similar activities (i.e. those relying on similar technology or practices, of a similar scale, and taking place in a comparable regulatory environment) have only been implemented with grants or other non-commercial finance terms and are undertaken in the relevant country/region; or
ii) no private capital is available from domestic or international capital markets due to real or perceived risks associated with investment in the host Party (demonstrated, for example, by a poor credit rating in that country);
b) Technological barriers - for example, that:
i) skilled and/or properly trained labour to operate and maintain the technology is not available in the relevant country/region, leading to an unacceptably high risk of equipment disrepair and malfunctioning or other underperformance;
ii) there is a lack of infrastructure for implementation and logistics for maintenance of the technology;
iii) there is a risk of technological failure which is significantly greater than for other technologies that provide comparable services or outputs; or
iv) the relevant technology is not available in the country or region;
c) Prevailing practice barriers - for example, that the project activity is the 'first of its kind'; or
d) Other barriers, which should be specified in the underlying methodology as examples (EB 70, Annex 8, paragraph 51).
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 alternatives, explain how they are affected less strongly than they affect the proposed CDM project activity. In other words, demonstrate that the identified barriers are not preventing the implementation of at least one of the alternatives. Any alternative 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 alternative shall be identified. (EB 70, Annex 8, paragraph 53)
Transparent and documented evidence of the assertions made in this sub-step must be provided, and should include at least one of the following:
(a) Relevant legislation, regulatory information or industry norms;
(b) Relevant (sectoral) studies or surveys (e.g. market surveys, technology studies, etc) undertaken by universities, research institutions, industry associations, companies, bilateral/multilateral institutions, etc;
(c) Relevant statistical data from national or international statistics;
(d) Documentation of relevant market data (e.g. market prices, tariffs, rules);
(e) Written documentation of independent expert judgments from industry, educational institutions (e.g. universities, technical schools, training centres), industry associations and others. (EB 70, Annex 8, paragraph 54)
If either step 2 or step 3 has been satisfied, step 4 should be undertaken as the final stage of the additionality analysis. If neither of these steps has been satisfied, the project will not be considered additional.
Step 4: Common practice analysis
Step 4 complements steps 1, 2 and 3 (as applicable) with an analysis of the extent to which the proposed project type (e.g. technology or practice) has already diffused in the relevant sector and region. 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/economically unattractive or faces barriers.
If a proposed CDM project activity falls under one of the four categories of measures above, then the latest version of the Guidelines on common practice shall be used to determine whether the activity is common practice.
However, if the proposed CDM project activity does not fall under one of the four categories above then the project proponent is to provide an analysis to which extent similar activities to the proposed CDM project activity have been implemented previously or are currently underway.
Similar activities are defined as:
activities that are of similar scale, take place in a comparable environment, inter alia, with respect to the regulatory framework and are undertaken in the applicable geographical area. (EB 70, Annex 8, paragraph 60)
On the basis of that analysis, project proponents shall describe whether and to which extent similar activities have already diffused in the applicable geographical area. If similar activities to the proposed CDM project activity are identified, then compare the proposed project activity to the other similar activities and assess whether there are essential distinctions between the proposed CDM project activity and the similar activities.
The proposed CDM project activity is regarded as "common practice" and therefore not additional if similar activities can be observed and essential distinctions between the proposed CDM project activity and similar activities cannot be identified (EB 70, Annex 8, paragraph 63).
However, if the proposed CDM project activity is not regarded as common practice, then the proposed CDM project activity is additional (EB 70, Annex 8, paragraph 64).