Combined baseline selection and additionality tool for A/R projects

A combined tool for large-scale afforestation and reforestation (A/R) CDM projects was agreed by the Executive Board at EB 35. In contrast to large-scale non-forestry projects for which the applicability of the combined tool is restricted, the A/R combined tool may become the standard means of identifying the baseline scenario for, and demonstrating the additionality of, A/R CDM projects.

The combined tool for A/R projects is similar to the combined tool for large-scale non-forestry sprojects. However, it differs in some important respects, as explained in this section.

Step 0: Preliminary screening

Firstly, the A/R combined tool contains an additional preliminary step (Step 0) which 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 19).

Step 1: Identification of alternative land-use scenarios to the proposed A/R project activity

Step 1 requires the identification of realistic and credible alternative scenarios to the implementation of the A/R project:

The identified land use scenarios shall at least include:

Continuation of the pre-project land use;

Forestation 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 socio-economic and ecological conditions to the proposed A/R CDM project activity occurring in a period since 31 December 1989 as selected by the PPs (EB 35, Annex 19).

To identify these scenarios, and use records, field surveys, data and feedback from stakeholders, and information from other appropriate sources may be used as appropriate.

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).

Step 2: Barrier analysis

Step 2 involves identifying barriers and assessing which alternatives are prevented by these barriers. These barriers include:

Investment barriers, such as:
- 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';
Barriers related to local tradition, such as:
- Traditional knowledge or lack thereof, laws and customs, market conditions and practices;
- Traditional equipment and technology.
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.
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;
- Possibilities of large price risk due to the fluctuations in the prices of products over the project period in the absence of efficient markets and insurance mechanisms;
- 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).

If, after conducting the barrier analysis:

forestation without registration as an A/R CDM project activity is the only remaining scenario, then the project is not additional;
another land-use scenario (not forestation without registration) is the only remaining scenario, then the remaining scenario is the baseline scenario, and step 4 (the common practice test) must be undertaken;
there are several remaining scenarios including forestation without registration, then the investment analysis must be conducted;
there are several remaining scenarios not including forestation without registration, then the investment analysis may be undertaken, or the scenario that involves the highest greenhouse gas removals by sinks (i.e. the most conservative scenario) may be adopted as the baseline.

Step 3: Investment analysis

Project proponents may choose to implement the simple cost analysis, the investment comparison analysis or the benchmark analysis.

If the simple cost analysis is undertaken:

If at least one land use scenario that is not prevented by any barrier generates financial benefits then select as the baseline the land use scenario that allows for the highest difference between incomes and costs [i.e. the most profitable] over the crediting period. Proceed to Sub-step 3d. Sensitivity analysis.

Otherwise, select as the baseline the land use scenario that allows for the highest baseline GHG removals by sinks. If the baseline is the proposed A/R CDM project activity then it is not additional. Otherwise, Proceed to Step 4. Common practice test (EB 35, Annex 19).

If investment comparison analysis is undertaken:

Identify the financial indicator, such as IRR7, NPV, payback period, cost benefit ratio most suitable for the project type and decision-making context (EB 35, Annex 19).

If benchmark analysis is undertaken:

Identify a suitable financial indicator, such as IRR8, 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 19).

For the investment comparison analysis and the benchmark analysis approaches, identified financial indicators must be calculated and compared.

If investment comparison analysis is used:

If forestation without registration is not prevented by any barrier, and the proposed A/R project activity has less favourable financial indicators than at least one alternative scenario, then the baseline scenario is the one which allows for the highest value of the financial indicators (i.e. the most profitable). A sensitivity analysis must be conducted.
If forestation without registration is not prevented by any barrier and the proposed A/R project activity has the most favourable financial indicators, then the project is not additional.
If forestation without registration is prevented by a barrier, then the baseline scenario is the one which allows for the highest value of the financial indicators (i.e. the most profitable). A sensitivity analysis must be conducted.

If benchmark analysis is used:

If forestation without registration is not prevented by any barrier, and the proposed A/R project activity has a financial indicator that does not meet the benchmark and an alternative scenario has a financial indicator that does meet the benchmark, then the baseline scenario is the land use scenario that meets the benchmark and allows for the most favourable financial indicator. A sensitivity analysis must be conducted.
If forestation without registration is not prevented by any barrier, and the proposed A/R project activity has a financial indicator meets the benchmark, then the project is not additional.
If the financial indicators of neither the A /R CDM project activity nor any of the alternatives meets the benchmark then the baseline scenario is the continuation of the pre-project land use.
If forestation without registration is prevented by the barrier, and at least one of the alternative scenarios is not prevented by any barrier and has a financial indicator that meets the benchmark, then the baseline scenario is the one which has the most favourable financial indicator. A sensitivity analysis must be conducted.
If forestation without registration is prevented by the barrier, and none of the alternative scenarios that is not prevented by any barrier has a financial indicator that meets the benchmark, then the baseline scenario is the continuation of the pre-project land use.

A sensitivity analysis must be conducted where there is more than one scenario which satisfies the investment tests:

If forestation without registration is not prevented by any barrier and the sensitivity analysis is conclusive, the baseline selection is valid.
If forestation without registration is not prevented by any barrier and the sensitivity analysis is not conclusive, the project activity is not additional.
If forestation without registration is prevented by a barrier and the sensitivity analysis is conclusive, the baseline selection is valid.
If forestation without registration is prevented by a barrier and the sensitivity analysis is not conclusive, the baseline scenario is the land use which allows for the highest greenhouse gas removals by sinks.

At EB 41, the Executive Board adopted version 2 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 41, paragraph 65).

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 determine whether and to what extent similar activities have already been implemented in the region. Any similar options that are occurring must be discussed, and 'essential distinctions' identified:

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 (EB 35, Annex 19).

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.

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.