The combined baseline selection and additionality demonstration tool
The Combined tool to identify the baseline scenario and demonstrate additionality (the combined tool) is designed to provide a general framework to identify the baseline scenario applicable to a proposed CDM project and simultaneously demonstrate that the project satisfies the CDM requirement of additionality.
The combined tool can only be applied to methodologies for which the potential alternative scenarios to the proposed project activity available to project proponents cannot be implemented in parallel to the proposed CDM project activity. For example, the combined tool may be used for an energy efficiency CDM project where the possible alternative scenarios are the retrofit of existing equipment, replacement with new equipment or the continued use of the existing equipment without any retrofits. Only one of the above scenarios could be implemented at any one time. (EB 70, Annex 9, paragraph 5)
Use of the combined tool is not compulsory, and project proponents may instead decide to calculate the baseline scenario using a new or approved methodology, and to separately demonstrate additionality using the additionality tool.
There are five stages to the combined tool represented by five steps:
Step 0: Demonstration that a proposed project activity is the first-of-its-kind
Step 1: Identification of alternative scenarios
Step 2: Barrier analysis
Step 3: Investment analysis
Step 4: Common practice analysis
The guidelines have been designed to apply to four types of measures. Measures are defined as a broad class of greenhouse gas emission reduction activities possessing common features. The four categories are:
(a) Fuel and feedstock switch;
(b) Switch of technology with or without change of energy sources (including energy efficiency improvements as well as the use of renewable energy);
(c) Methane destruction;
(d) Methane formation avoidance. (EB 70, Annex 9, paragraph 9)
Step 0: Demonstration of whether the proposed project activity is the first-of-its-kind
This preliminary step in the combined tool is optional and is one method through which additionality can be demonstrated for a CDM project activity. If it is not applied, 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 the 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 the first-of-its-kind.
Regardless of the outcome of this preliminary step all project proponents progress to step 1. (EB 70, Annex 9, Paragraphs 10-13)
Step 1: Identification of alternatives to the project activity consistent with current laws and regulations
The purpose of this stage of the combined tool is to identify all alternative scenarios to the proposed CDM project activity(s) which can be used to form the baseline scenario. This stage can be divided into two sub-steps.
Step 1(a) is directed towards the identification of realistic and credible alternatives to the project scenario. Project proponents shall identify all alternative scenarios that are available to the project proponents that provide the same output and cannot be implemented in parallel to the proposed CDM project activity. The alternative scenarios that should be considered include:
1) The proposed project activity undertaken without being registered as a CDM project activity;
2) Where applicable, no investment is undertaken by the project proponents but third party(ies) undertake(s) investments or action which provide the same output to users of the project activity;
3) Where applicable, the continuation of the current situation, not requiring any investment or expenses to maintain the current situation, such as the continued venting of methane from a landfill;
4) Where applicable, the continuation of the current situation, requiring an investment or expenses to maintain the current situation, the continued use of existing equipment which involves ongoing operation and maintenance costs;
5) Other plausible and credible alternative scenarios to the project activity scenario, including the common practices in the relevant sector, which deliver the same output;
6) Where applicable; the "proposed project activity undertaken without being registered as a CDM project activity" to be implemented at a later point in time, such as at the end of life of existing equipment (EB 70, Annex 9, paragraph 16).
Where the proposed CDM project activity includes several different facilities, technologies or outputs, alternative scenarios for each of them should be identified separately and realistic combinations of these considered as possible alternative scenarios to the proposed project activity (EB 70, Annex 9, paragraph 17).
In identifying relevant alternative scenarios, project proponents shall outline other technologies or practices that provide the same output as the proposed project activity and that have been implemented previously or are currently underway in the applicable geographical area. As a default, the applicable geographical area covers the entire host country. However, if the applicable geographical area does not include ten facilities (or projects) that provide the same output as the proposed CDM project activity, the area should be expanded to an area that covers, if possible, ten such facilities (or projects). Existing registered CDM project activities are not to be included in this analysis.
Step 1(b) is directed towards ensuring compliance with all the mandatory laws and regulations.
Project proponents shall consider whether the alternative scenario(s) identified are in compliance with all mandatory applicable legal and regulatory requirements, even if these laws and regulations have objectives other than GHG reductions. If a alternative scenario does not comply with binding laws and regulations then it is to be eliminated, unless it can be demonstrated that non-compliance with those requirements is widespread in the country (EB 70, Annex 9, paragraph 19).
If the proposed CDM project activity is in compliance with the mandatory regulations with which there is general compliance, then the proposed CDM project activity is not additional.
However, if more than one alternative scenario is in compliance with mandatory regulations, taking into account their enforcement, then the project proponent proceeds to Step 2 (EB 70, Annex 9, paragraph 21).
Step 2: Barrier analysis
This step, along with the Guidelines for objective demonstration and assessment of barriers is directed towards the identification of barriers and the assessment of which alternative scenarios are prevented by these barriers.
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; 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, 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; or
c) Other barriers, which should be specified in the underlying methodology as examples.
Once the above barriers have been identified, project proponents shall identify which alternative scenarios are prevented by at least one of the barriers, and eliminate those alternative scenarios from further consideration (EB 70, Annex 9, paragraph 24).
Transparent and documented evidence of the assertions made in this 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 from the company or institution developing or implementing the CDM project activity or the CDM project developer, such as minutes from Board meetings, correspondence, feasibility studies, financial or budgetary information, etc;
(f) Documents prepared by the project developer, contractors or project partners in the context of the proposed project activity or similar previous project implementations;
(g) Written documentation of independent expert judgments from industry, educational institutions (e.g. universities, technical schools, training centres), industry associations and others. (EB 70, Annex 9, paragraph 25)
The combined tool provides for a number of outcomes to this step from the above analysis:
1) If there is only one alternative scenario that is not prevented by any barrier, and this alternative is the implementation of the proposed CDM project activity without registration, then the project is not additional;
2) If there is only one alternative scenario that is not prevented by any barrier, and this alternative scenario is not the proposed CDM project activity without registration, then this alternative is identified as the baseline scenario;
a) If the proposed project activity is the first-of-its-kind it is additional and no further steps are required;
b) Otherwise the project proponent shall explain how the registration of the CDM project activity will alleviate the barriers that prevent the proposed project activity from occurring in the absence of the CDM;
3) If there are a number of alternative scenarios that are not prevented by any barriers, including the implementation of the proposed CDM project activity without registration, and the proposed project is first-of-its-kind, then it is additional and the baseline may be established by:
a) The use of step 3 - investment analysis; or
b) From the remaining alternative scenarios, not including the proposed CDM project activity without being registered, identify the one with the lowest emissions as the baseline scenario. No further steps are required;
4) If there are a number of alternative scenarios that are not prevented by any barriers, including the implementation of the proposed CDM project activity without registration, and the proposed project is not first-of-its-kind, then the project proponent shall proceed to the investment analysis in step 3.
5) If there are a number of alternative scenarios that are not prevented by any barriers, not including the implementation of the proposed CDM project activity without registration, and the proposed project is first-of-its-kind, then it is additional and the baseline may be established by:
a) The use of step 3 - investment analysis; or
b) From the remaining alternative scenarios identify the one with the lowest emissions as the baseline scenario. No further steps are required;
6) If there are a number of alternative scenarios that are not prevented by any barriers, not including the implementation of the proposed CDM project activity without registration, and the proposed project is not first-of-its-kind then project proponents shall demonstrate additionality by explaining how the registration of the CDM project activity will alleviate the barriers that prevent the proposed project activity from occurring in the absence of the CDM. The baseline can be established by either:
a) The use of step 3 - investment analysis; or
b) From the remaining alternative scenarios identify the one with the lowest emissions as the baseline scenario and proceed to step 4 - common practice analysis.
Step 3: Investment analysis
This step, along with the Guidelines on the assessment of investment analysis, is directed towards determining which of the remaining alternative scenarios is the most economically or financially attractive. For this purpose, an investment comparison analysis is conducted for these remaining alternative scenarios. If the investment analysis is conclusive, the economically or financially most attractive alternative scenario is considered the baseline scenario. This analysis should include scenarios where the project proponents do not undertake an investment.
All financial indicators for each alternative must be identified:
Identify the financial indicator, such as IRR6, 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 9, paragraph 28)
The financial indicators of each alternative must then be calculated and compared. All relevant costs (including the costs of investment, maintenance and operation, and so on) and revenues (excluding CER revenue, but including subsidies/fiscal incentives, official development assistance and so on) should be included. Assumptions across the different scenarios (project and alternatives) must be consistent unless there are good reasons for inconsistencies (EB 70, Annex 9, paragraph 29).
This analysis is to be conducted based on market standards:
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. In the particular case where the project activity can only be implemented by the project participant, the specific financial/economic situation of the company undertaking the project activity can be considered. (EB 70, Annex 9, paragraph 31)
The discount rate (in the case of the NPV) or the financial benchmark (in the case of the IRR) shall be derived from:
(a) 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 or documented by official publicly available financial data;
(b) 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;
(c) A company internal financial benchmark (weighted average cost of capital of the company), only in the particular case that the project activity can only be implemented by the project participant. The project developers shall demonstrate that this financial benchmark has been consistently used in the past, i.e. that project activities under similar conditions developed by the same company used the same financial benchmark;
(d) A government/officially approved financial benchmark where it can be demonstrated that such financial benchmarks are used for investment decisions;
(e) Any other indicators if the project proponents can demonstrate that the above options are not applicable and their indicator is appropriately justified. (EB 70, Annex 9, paragraph 32)
A sensitivity analysis should also be undertaken to assess whether the conclusion regarding the financial attractiveness is robust to reasonable variations in the critical assumptions. The investment analysis only provides a valid argument in identifying the baseline scenario if it consistently supports the conclusion that one alternative scenario is the most economically and/or financially attractive.
The alternatives should then be ranked according to the most suitable financial indicator, taking into account the results of the sensitivity analysis. If the sensitivity analysis is not conclusive, then the alternative scenario to the project activity with least emissions among the alternative scenarios is considered as the baseline. If the sensitivity analysis confirms the result of the investment analysis, then the most economically or financially attractive alternative scenario is considered as the baseline.
If the alternative considered as the baseline is the proposed CDM project activity without being registered, then it is not additional. Otherwise, the project proponent shall proceed to the next stage (EB 70, Annex 9, paragraph 35).
Step 4: Common practice analysis
This step, is directed towards an analysis of the extent to which the proposed project type (e.g. technology or practice) has already diffused in the relevant sector and applicable geographical area such that it is now common practice. This step acts as a credibility check to demonstrate additionality and compliments the previous two steps.
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 is to 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 9, paragraph 47)
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 9, paragraph 50).
However, if the proposed CDM project activity is not regarded as common practice, then the proposed CDM project activity is additional (EB 70, Annex 9, paragraph 50).