Carbon Market Watch

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Additionality: the trouble with large-scale CDM projects (Newsletter #17)

04 Nov 2011

Additionality is intrinsically difficult to tackle and one of the main reasons why offsetting remains contentious. Recent publications and discussions highlight the fact that very large CDM projects are quite unlikely to be additional. The CDM Executive Board will discuss these additionality concerns during its upcoming meeting in Durban. This article gives you background information and explains why large infrastructure projects should be excluded from the CDM.

Large-scale infrastructure projects are usually planned by governments that make decisions based on numerous strategic factors that are usually not profit-driven. This makes it unlikely that the CDM plays a deciding factor. In other words, such large projects are most likely non-additional.

To get a project registered under the CDM, a project developer has to credibly show that their project is additional, i.e. they can only build their project because they will receive revenue from the sale of CDM offsets (CERs). Additionality matters because CERs are used to replace emissions reductions in developed countries. For example, a power producer in the EU who purchases 10,000 CERs can emit 10,000 tons more of CO2 than if they would have to reduce their emissions internally. If these CERs have not resulted in real emissions reductions, global emissions will increase by 10,000 tons. However, additionality is intrinsically difficult to tackle and one of the main reasons why offsetting is such a contentious policy instrument.

At least 40% of projects are non-additional

It is difficult to know how many of the projects currently approved in the CDM are truly additional. One of the best studies on this topic, by the Öko Institute[1], estimates that 40% of the projects in the CDM are non-additional (or ‘business-as-usual’). Anecdotal evidence, such as the recent Wikileaks document from India, and informal conversations with project developers indicate that the proportion of non-additional projects is probably higher. Large projects tend to generate more offsets (CERs) than small projects. To illustrate, of the approximately 1200 projects that have generated CERs so far, close to two thirds are large scale projects, yet these 800 projects have generated 96% of all CERs (717 million). The 400 small scale projects have generated only about 28 million CERs. Because of this fact and because large projects are more likely to be non-additional than small ones the percentage of CERs that are non-additional is likely to be well above 40%.

Very large projects are less likely to be additional

Large infrastructure projects, such as power plants or transportation projects are usually part of strategic long term plans of governments. Decisions about such public sector projects are not based on purely financial considerations and are usually not profit-driven, which makes it unlikely that CDM funding is a deciding factor. The CDM can therefore at best speed up implementation of such projects. It is not credible to claim that very large investments are dependent on CDM registration.

A recent study by the Stockholm Environment Institute, shows that the coal power projects in the CDM pipeline are extremely unlikely to be additional (see article on coal). The same holds true for large hydro projects, as other studies have shown. Both these project types are contentious, because they often have severe impacts on local populations.

Improving additionality of large scale projects

At the upcoming Board meeting, CDM Executive members will discuss possible changes that the Dutch member, Lex de Jonge (who is also chair of the Methodologies Panel) has suggested. In his presentation at the last meeting he suggested ways to reduce the number of very large non-additional projects being registered in the CDM in future. He pointed out that in many cases the CDM has no decisive influence on investment decisions and explicitly mentioned coal plants and large hydro plants, mass transit systems and any project that requires investment over US$50 million. His suggestions included:

  • The internal rate of return (IRR) baseline should be at least [4-5] % (absolute) above project IRR
  • The difference in levelised cost (in case of power production) should be at least [10-20] % (relative)
  • Large public sector investments (e.g. mass rapid transport) should have a limited crediting period of [7-10] years
  • Clear technology step-changes in industry, requiring investments >US$ [50-100] million should not be considered, since change in technology encompasses many other benefits (e.g. product quality, production rate and capacity).

CDM Watch recommends:

While we welcome recommendations to make the additionality tool more stringent, these changes do not target the large number of projects that have already been registered. CDM Watch therefore advocates a two-pronged approach:

1) Improve additionality testing for future projects. Moving away from a project-by-project assessment may help increase environmental integrity in certain sectors.

2) Exclude large infrastructure projects that are clearly non-additional (and often, as in the case of coal and hydro power projects, can have severe negative impacts on local populations).

The tool for the demonstration and assessment of additionality is the most common method used for proving the additionality of proposed CDM projects. The tool has three basic steps.[2] The project proponent must:

  • Identify alternatives to the project activity
  • Conduct an investment analysis or barrier analysis to prove the project would not otherwise proceed, either because it is less economically or financially attractive or because it is impeded by greater barriers than other alternatives
  • Undertake a common practice analysis to provide a ‘credibility check’ for types of project activities that are already commonly implemented.

[1] Is the CDM fulfilling its environmental and sustainable development objectives? An evaluation of the CDM and options for improvement, November 2007 available at http://www.oeko.de/oekodoc/622/2007-162-en.pdf