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 may only be used if the potential alternative scenarios to the proposed project activity available to project participants cannot be implemented in parallel to the proposed project activity (EB 60, Annex 7).

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. Project participants may also propose other tools for the identification of the baseline scenario and demonstrate additionality to the Executive Board for its consideration (EB 28, Annex 14).

DOEs, in conducting validation of projects that have used the combined tool, should:

carefully assess and verify the reliability and credibility of all data, rationales, assumptions, justifications and documentation provided by project participants to support the selection of the baseline and demonstration of additionality (EB 28, Annex 14).

The combined tool sets out the following steps:

• Step 1: Identification of alternatives to the project activity consistent with mandatory laws and regulations
• Step 2: Barrier analysis
• Step 3: Investment analysis
• Step 4: Common practice analysis

The diagram below describes the operation of the combined tool. Each of the steps is discussed in more detail below (EB 28, Annex 14).

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 participants are required to identify alternative scenarios, including:

• The proposed project activity undertaken without being registered as a CDM project activity;
• Where applicable, no investment is undertaken by the project participants but third party(ies) undertake(s) investments or actions which provide comparable outputs or services to users of the project activity;
• Where applicable, the continuation of the current situation, not requiring any investments or expenses to maintain the current situation, such as, inter alia:
  
  • The continued venting of methane from a landfill;
  • The continued release of N2O from adipic or nitric acid production;
• Where applicable, the continuation of the current situation, requiring an investment or expenses to maintain the current situation, requiring an investment or expenses to maintain the current situation, such as, inter alia:
  
  • The continued use of an existing boiler involving expenses for operation and maintenance;
  • The continued use of a specific fuel mix for power generation in an existing power plant (EB 60, Annex 7);
• Other plausible and credible alternative scenarios to the project activity scenario, including the common practices in the relevant sector, which deliver outputs or 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;
• Where applicable, the "proposed project activity to be implemented without being registered as a CDM project activity" undertaken at a later point in time (e.g. due to existing regulations, end-of-life of existing equipment, financing aspects) (EB 60, Annex 7).

If the proposed CDM project activity includes several different facilities, technologies, outputs or services, 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.

The alternative scenarios should be in place within the same geographical area as the proposed project activity:

The relevant geographical area should in principle be the host country of the proposed CDM project activity. A region within the country could be the relevant geographical area if the framework conditions vary significantly within the country. However, the relevant geographical area should include preferably ten facilities (or projects) that provide outputs or services with comparable quality, properties and application areas as the proposed CDM project activity. If less than ten facilities (or projects) that provide outputs or services with comparable quality, properties and application areas as the proposed CDM project activity are found in the region/host country, the geographical area may be expanded to an area that covers if possible, ten such facilities (or projects). In cases where the above described definition of geographical area is not suitable, the project proponents should provide an alternative definition of geographical area. Other registered CDM project activities are not to be included in this analysis (EB 60, Annex 7).

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 scenario(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 60, Annex 7).

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 scenario 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 scenario from further consideration (EB 60, Annex 7).

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 scenario 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 60, Annex 7).

Step 2: Barrier analysis

Step 2 involves identifying barriers and assessing which alternative scenario(s) are prevented by these barriers.

Sub-step 2(a) involves determining whether there are:

realistic and credible barriers that may prevent alternative scenarios from occurring (EB 28, Annex 14).

These barriers may include:

• Investment barriers - for example, that:
  • 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
  • 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);
• Technological barriers - for example, that:
  • 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;
  • there is a lack of infrastructure for implementation and logistics for maintenance of the technology;
  • there is a risk of technological failure which is significantly greater than for other technologies that provide comparable services or outputs; or
  • the relevant technology is not available in the country or region;
• Prevailing practice barriers - for example, that the project activity is the 'first of its kind'; or
• Other barriers, which should be specified in the underlying methodology as examples.

Sub-step 2(b) requires the elimination of alternative scenarios that are prevented by the alternative barriers.

Transparent and documented evidence of the assertions made in this step must be provided, and should include at least one of the following:

1. Relevant legislation, regulatory information or industry norms;
2. Relevant (sectoral) studies or surveys (e.g. market surveys, technology studies, etc) undertaken by universities, research institutions, industry associations, companies, bilateral/multilateral institutions, etc;
3. Relevant statistical data from national or international statistics;
4. Documentation of relevant market data (e.g. market prices, tariffs, rules);
5. 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;
6. Documents prepared by the project developer, contractors or project partners in the context of the proposed project activity or similar previous project implementations;
7. Written documentation of independent expert judgments from industry, educational institutions (e.g. universities, technical schools, training centres), industry associations and others (EB 29, Annex 5).

The outcomes of this step are as follows:

• If there is only one alternative scenario not prevented by any barrier, and this alternative is implementation of the proposed project activity without registration under the CDM, then the project is not additional.
• If there is only one alternative scenario not prevented by any barrier, and this alternative is not implementation of the proposed project activity without CDM registration, then this is the baseline scenario. An explanation must be given as to how registration alleviates the identified barriers for the project activity. If registration does not alleviate these barriers, the project is not additional.
• If there are several alternatives remaining, including implementation of the proposed project activity without registration under the CDM, investment analysis (step 3) must be undertaken.
• If there are several alternatives remaining and these alternatives do not include implementation of the proposed project activity without registration, then an explanation must be given as to how registration alleviates the identified barriers for the project activity. If registration does not alleviate these barriers, the project is not additional. If registration does alleviate the barriers:
  • Investment analysis may be conducted to determine the baseline (i.e. most financially plausible) scenario; or
  • The alternative with the lowest (i.e. most conservative) emissions can be adopted as the baseline scenario.

Step 3: Investment analysis

This step serves to determine 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 participants do not undertake an investment (EB 60, Annex 7).

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 28, Annex 14). If one of the alternative scenarios remaining after Step 2 corresponds to the situation described in Step 2 or Step 3, then use either the NPV or the IRR as financial indicators in the analysis (EB 60, Annex 7).

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.

For alternative scenarios that correspond to the situation described in S2 or S3 and that do not involve any investment costs, operation costs or revenues, use the following values for the financial indicator to reflect such a situation:

• If the financial indictor is the IRR: Use as the IRR the financial benchmark, as determined through the options (a) to (e) below.

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.

The discount rate (in the case of the NPV) or the financial benchmark (in the case of the IRR) shall be derived from:

1. 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;
2. 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;
3. 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;
4. A government/officially approved financial benchmark where it can be demonstrated that such financial benchmarks are used for investment decisions;
5. Any other indicators if the project participants can demonstrate that the above options are not applicable and their indicator is appropriately justified (EB 60, Annex 7).

The alternatives should then be ranked according to the financial indicator. The investment analysis should be presented in a clear and transparent manner in the PDD (or in separate annexes).

A sensitivity analysis must be conducted:

to assess whether the conclusion regarding the financial attractiveness is robust to reasonable variations in the critical assumptions. The investment comparison analysis provides a valid argument in identifying the baseline scenario only if it consistently supports (for a realistic range of assumptions) the conclusion that one alternative is the most economically and/or financially attractive (EB 28, Annex 14).

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 scenario. However, if the sensitivity analysis confirms the result of the investment comparison analysis, then the most economically attractive alternative scenario is considered as the baseline scenario.

At EB 62, the Executive Board adopted version 5 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 62, Annex 5).

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 unattractive or faces barriers.

This step involves analysing activities similar to the proposed project activity to describe whether and to which extent similar activities have already been implemented in the region. Any similar options that are occurring must be discussed, and 'essential distinctions' identified:

If similar activities to the proposed 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 project activity and the similar activities. If this is the case, point out and explain the essential distinctions between the proposed project activity and the similar activities and explain why the similar activities enjoyed certain benefits that rendered them financially attractive (e.g., subsidies or other financial flows) and which the proposed project activity can not use or why the similar activities did not face barriers to which the proposed project activity is subject. (EB 28, Annex 14).

Essential distinctions may include a serious change in circumstances under which the proposed CDM project activity will be implemented when compared to circumstances under which similar projects were carried out, such as new barriers or the removal of policy incentives.

The proposed project activity is additional if Sub-step 4 is satisfied as:

• Similar activities cannot be observed or;

• Similar activities are observed but essential distinctions between the proposed CDM project activity and similar activities can be reasonably explained (EB 60, Annex 7).

Development of the combined baseline selection and additionality tool

At EB 10, the Executive Board clarified that the baseline methodology may be used to demonstrate that a project is additional and therefore not the baseline scenario (EB 10, Annex 1, paragraph 1). However, it was not until EB 20 that the Executive Board made its first request to the Methodology Panel to develop a tool to assist in the selection of a baseline scenario from a set of alternatives that could also make reference to the existing additionality tool.

This request was also reflected in the outcomes from COP/MOP 1, at which the COP/MOP requested the Executive Board:

to make a call for public input, in accordance with paragraphs 43 to 45 of the modalities and procedures for a clean development mechanism, on:

1. New proposals to demonstrate additionality, including options to combine the selection of the baseline scenario and the demonstration of additionality; and
2. Proposals to improve the "tool for the demonstration and assessment of additionality" (7/CMP.1, paragraph 25).

At EB 23, a draft "baseline scenario selection tool" was submitted by the Methodology Panel to the Executive Board. The tool was never formally adopted by the Executive Board.

At the same meeting, however, the Executive Board then agreed, in response to the request from the COP/MOP, to request that the Meth Panel prepare a set of recommendations regarding the merging of a baseline selection tool and additionality tool into a single tool for both purposes (a combined tool).

While acknowledging that the consultation process had led to little public comment on the development of alternative tools, including a combined tool, at EB 26 the Executive Board requested that the Meth Panel:

focus as a priority on a clear and if possible broadly applicable "combined tool", as well as on improvement of the existing additionality tool, taking into account input from the public (EB 26, at [37]).

The first version of the combined tool was accepted and approved by the Executive Board at EB 27 (EB 27, Annex 9). At EB 28, the Executive Board revised the first version of the combined tool to:

expand its applicability to newly built facilities where the alternative scenarios to the project activity are available options to project participants" (EB 28, paragraph 19).

The second version remains the current approved version of the combined tool (EB 28, Annex 14).