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 Participants to assess additionality. The additionality tool is applicable to a wide range of project types.

The latest version of the additionality tool (Version 05) was adopted at EB 39, Annex 10.  This version replaces EB 36, Annex 13 (Version 04), EB 29, Annex 5 (Version 03), EB 22, Annex 8 (Version 2) and EB 16, Annex 1 (Version 1).

Use of the tool is not obligatory:

The Conference of the Parties serving as the meeting of the Parties, ...

28. Confirms that, as stipulated in decision 12/CP.10, the use of the "tool for the demonstration and assessment of additionality" is not mandatory for Project Participants, and that in all cases the Project Participants may propose alternative methods to demonstrate additionality for consideration by the Executive Board, including those cases where the "tool for the demonstration and assessment of additionality" is attached to an approved methodology (7/CMP.1, paragraph 28).

However, when reference is made in approved methodologies to the use of the additionality tool, this means that the tool is part of the methodology and must be used (EB 21, paragraph 17).

The Executive Board has indicated that taking into account the guidance by the COP/MOP to broaden the scope and applicability of methodologies, no restrictions on the use of the additionality tool (such as use of investment analysis only) should be imposed by the Methodologies Panel or the working groups (EB 31, paragraph 31).

The Executive Board has confirmed that, in establishing additionality in the PDD, Project Participants:

...shall refrain from providing glossaries or using key terminology not used in the COP documents and the CDM glossary (environmental/investment additionality) (EB 9, Annex 3, paragraph 3).

The additionality tool sets out the following steps to demonstrate and assess additionality:

• 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
• 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:

The use of this tool to assess and determine additionality does not replace the need for the baseline methodology to provide for a stepwise approach to identify the baseline scenario. Project Participants proposing new baseline methodologies shall ensure consistency between the determination of additionality of a project activity and the determination of a baseline scenario (EB 39, Annex 10, paragraph 7).

The diagram below describes the operation of the additionality tool. Each of the steps is discussed in more detail below (EB 39, Annex 10) (yellow highlighting shows the changes made to Version 04).

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:

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:

• The proposed project activity undertaken without being registered as a CDM project activity;
• 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;
• If applicable, continuation of the current situation (no project activity or other alternatives undertaken).

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 project activity

For the purpose of identifying relevant alternative scenarios, the Project Participant 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 39, Annex 10).

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 39, Annex 10).

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 39, Annex 10).

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.

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 39, Annex 10).

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).

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:

Determine whether to apply simple cost analysis, investment comparison analysis or benchmark analysis (sub-step 2b). If the CDM 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, use the investment comparison analysis (Option II) or the benchmark analysis (Option III) (EB 39, Annex 10).

The chosen method must then be applied, as described in sub-step 2(b). 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 39, Annex 10).

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 39, Annex 10).

If the benchmark analysis is chosen:

Identify the financial/economic indicator, such as IRR, most suitable for the project type and decision context (EB 39, Annex 10).

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 Participant, the specific financial/economic situation of the company undertaking the project activity can be considered.

The financial indicator can be based on either project IRR or equity IRR:

The financial indicator can be based either on (1) project IRR or (2) equity IRR. There is no general preference between the approaches (1) or (2). The benchmark chosen for analysis shall be fully consistent with the choice of approach. The CDM-PDD shall contain clear and transparent arguments to demonstrate how the parameters were derived (EB 39, Annex 10).

Sup-step 2(c) involves calculating and comparing the financial indicators of the proposed project activity and the alternatives identified in step 1. 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. 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:

... 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 para 11a) or is unlikely to be financially/economically attractive (as per Step 2c para 11b) (EB 39, Annex 10).

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 51, the Executive Board adopted version 3 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 51, paragraph 77).

Step 3: Barrier analysis

Step 3 involves determining whether the proposed project activity faces barriers that:

1. prevent the implementation of this type of proposed project activity; and
2. do not prevent the implementation of at least one of the alternatives (EB 39, Annex 10).

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 39, Annex 10).

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 39, Annex 10).

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 and are undertaken in the relevant country/region; 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 in the relevant country/region, 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.

A project activity that is indentified as a first-of-its-kind project activity is additional, however its crediting period can only be for a maximum of 10 years with no option of renewal.

A proposed project activity is the first-of-its-kind in the applicable geographical area if:

The project is the first in the applicable geographical area that applies a technology that is different from any other technologies able to deliver the same output and that have started commercial operation in the applicable geographical area before the state of the project.

The default "applicable geographical area" covers the entire host country. If the technology applied is not country specific, then the applicable geographical area should be extended to include other countries. Project participants are able to justify an applicable geographical area smaller than the host country for technologies that vary considerably across locations depending on local conditions.

The Executive Board has requested that during validation designated operational entities (DOEs) should ensure that Project Participants using the additionality tool only select relevant barriers in presenting the additionality of the proposed project activity, and provide an analysis of the barriers presented in the PDD (EB 24, paragraph 79).

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 39, Annex 10).

Transparent and documented evidence of the assertions made in this sub-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 of independent expert judgments from industry, educational institutions (e.g. universities, technical schools, training centres), industry associations and others (EB 39, Annex 10).

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.

Sub-step 4(a) 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.

Sub-step 4(b) requires a discussion of any similar options that are occurring, and an identification of 'essential distinctions':

...if similar activities are identified above, then it is necessary to demonstrate why the existence of these activities does not contradict the claim that the proposed project activity is financially/economically unattractive or subject to barriers. This can be done by comparing the proposed project activity to the other similar activities, and pointing out and explaining essential distinctions between them that explain why the similar activities enjoyed certain benefits that rendered it financially/economically attractive (e.g., subsidies or other financial flows) and which the proposed project activity cannot use or did not face the barriers to which the proposed project activity is subject. If necessary data/information of some similar projects are not accessible for PPs to conduct this analysis, such projects can be excluded from this analysis. In case similar projects are not accessible, the PDD should include justification about non-accessibility of data/information (EB 39, Annex 10).

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.

At EB 63 the Executive Board produced the "Guidelines on Common Practice" which provide a stepwise approach for determining whether a proposed project activity is a "common practice" within a sector in the applicable geographical area.

Alternative mechanisms for establishing additionality

The Executive Board has received submissions on alternative methods of demonstrating additionality such as benchmarks, positive lists and market penetration. The Executive Board has expressed the view that such proposals may provide a simple procedure to demonstrate additionality, and it encourages Project Participants to present clear and precise ways to implement these ideas as a part of proposed new methodologies (EB 28, paragraph 21).