CDM PROJECT DEVELOPMENT GUIDELINES

Article 12 of the Kyoto Protocol establishes the Clean Development Mechanism (CDM). The CDM allows investors in developed countries to generate certified emissions reductions (CERs) by engaging in climate change mitigation projects in developing countries. For purposes of the Protocol, developing countries are those that that did not agree to take on an emissions limitation under the treaty. Developed countries can use the CERs generated by such projects to meet their emissions limitation requirements under the Protocol.

For a project to qualify as a CDM project, an investor must receive host country approval for the project and ensure that the project conforms to the specific criteria set forth in the Marrakech Accords. After a project has been registered as a CDM project by the Executive Board, the oversight committee for the mechanism established by Article 12, and after an accredited, independent third party has verified emissions reductions from the project in a certification report, the Board determines how many CERs will be issued for the project.

CDM projects have been attractive to some investors in the international green-house gas (GHG) market as a potential method of generating low-cost emissions reductions. One of the primary attractions of this mechanism is that emissions reductions generated between 2000 and 2008 can be used for compliance in the first commitment period (2008-12) toward an emissions limitation, if they meet specified criteria. (By contrast, in developed countries, only those reductions generated during the first commitment period are eligible for compliance.) The interest in CDM is growing, even though the newly established Board and the Conference of Parties must still formally agree upon further rules governing its operation.

To maximize the likelihood of attaining Board approval and to attract premium prices for CERs, project developers should follow a rigorous methodology for developing a CDM project. The following issues should be addressed when structuring a CDM candidate project.

1. Initiate Paper Trail for Proof of Intention

The Board requires project sponsors to validate that one of the project's intended benefits is to reduce GHG emissions. It is important to document intention to seek CDM approval through every stage of the project, in internal project documentation and correspondence with partners, investors, and governments.

2. Determine Eligibility of Project Concept

In the absence of official CDM rules, project developers should anticipate what types of activities are likely to be eligible for credit in the future. Some guidance already exists.

CDM projects must:

• create real, measurable, and long-term GHG benefits;
• generate additional, verifiable emissions reductions;
• conform to the sustainable development objectives of the host country;
• be certified by officially designated entities; and
• begin after 1 January 2000.

The Board will elaborate further project eligibility guidelines and simplified procedures for small-scale renewable energy and energy efficiency projects. Further guidance may be gleaned from national pilot programs or initiatives sponsored by international financial institutions.

3. Document Project Additionality

In advance of the Board's final certification rules, participants should be very conservative when addressing the following types of additionality.

• Environmental Additionality: Prove that the project reduces GHG emissions below those that would have occurred in the absence of the proposed project. (below the "baseline" emissions forecast).
  
  
• Beyond Normal Development Assistance: If government financed, the project should not result in the "diversion of official development assistance."

4. Assess Sustainable Development Impacts

A CDM project must promote sustainable development in the host country. Therefore, it is important to document economic, environmental and social impacts resulting from the project. The following issues should be addressed prior to approaching the host government for project approvals.

• Does the project fit within overall sustainable development objectives of the host
  government?
  
  
• Do other environmental benefits resulting from the project make it more attractive, such
  as enhancing or protecting biodiversity?
  
  
• What is the impact of the project on employment levels in the country?
  
  
• Will the project result in displacement of economic activities? If so, are there any
  contingency plans to address this displacement?

5. Secure Support of Host Government

Host-country governments must approve the project. Developers should obtain a formal letter of approval from the highest level of government possible. Some developing countries are in the process of establishing CDM offices to assist project developers. Their functions will include determining project eligibility, ensuring that sustainable development objectives are met, providing technical assistance, and, in some cases, facilitating host government approvals.

6. Calculate, Monitor and Verify Potential Reductions

1. Establish environmental additionality.
   
   Developers must prove that the project will generate emissions reductions relative to a baseline level of emissions that are additional to any that would have occurred in absence of the project.
   
   
2. Construct an emissions baseline with an accepted methodology
   
   Establish an emissions baseline that reflects a "without project" emissions scenario. Reductions achieved with the project will be measured against this baseline. Under the Kyoto Protocol, the crediting period for a proposed CDM project may be :
   
   
   1. a maximum of seven years, which may be renewed twice provided that the original project baseline is determined still valid or updated to take into account new data ; or
   
   
   
   2. a maximum of ten years with no option of renewal.
      
      
3. Monitor emissions and maintain environmental integrity
   
   Emissions reductions must be monitored over the life of a project. A third party may be used to establish a suitable monitoring methodology and to conduct periodic reviews.
   
   
4. Engage third party to validate project performance
   
   Claimed reductions must be verified and certified by entities designated by the CDM Executive Board. Only after receiving this certification can emissions reductions generated by the project be recognized as CERs that can be easily transacted in the market. Once the project is operating, developers should employ a credible third party to verify:
   
   
• Actual emissions reductions achieved;
  
  
• Contributions to sustainable development of the host country;
  
  
• Accurate assessment of emissions increases in other areas or sectors due to project
  activities (leakage); and
  
  
• Any other project performance criteria.

7. Establish Clear Ownership of CERs

Clear title to reductions will increase their value in the market. Buyers of reductions will need to verify that sellers own the reductions being offered. Therefore, written agreements should clearly define whether rights to emissions reductions are owned exclusively by investors, developers, the host country government, or some combination thereof.

8. Ensure Financial Viability

The financial integrity and strength of project financing are important aspects of the pre-compliance / risk management market. Accurately representing project costs and revenue while planning and marketing a project is imperative to ensure the project's financial viability under current conditions and ability to reach completion. This includes applying realistic projections for the future price of the resulting CERs, crucial consideration for both potential project investors and for potential buyers of forward pre-certification reductions/CERs. Project developers should be prepared to provide potential buyers with proof of investor and owner financial viability.

9. Pursue Additional Project Endorsement

To build a strong case for the project, participants could seek approval by an international entity involved in climate change activities. Industry associations, government and multilateral climate change funds, and Activities Implemented Jointly (AIJ) offices in some Annex I countries, often evaluate and approve GHG emissions reducing projects. Preparation of application documents by these entities will assist developers in gathering and presenting the necessary information for future application to the Board.

10. Fast Track Small Project

The Board has recommended simplified "fast track" procedures for small-scale CDM activities at COP-8 Meet in New Delhi, especially for Renewable Energy Projects (under 15 MW) and Energy Efficiency Projects (below 15 GWh/year)..