Carbon Market Watch

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Additionality & Baselines

Problematic CDM Projects to WATCH!

Nallakonda – Wind farm project, India

Rampur – Hydro power project, India

View more examples…

Carbon offset mechanisms such as the CDM can only be effective climate mitigation policy tools if their resulting carbon offset credits represent actual emissions reductions achieved by a project.  This is usually referred to as the ‘environmental integrity’ of an offset mechanism or its offsets. Offsetting mechanisms such as the CDM are zero-sum mechanisms. In other words they do not lead to additional emission reductions beyond those determined under the cap (see carbon trading) . They only lead to a geographic shift – e.g. instead of reducing their own emissions, a European power plant buys CDM credits to comply with its obligations in the European trading scheme. If credits that are bought have low environmental integrity, they actually cause an increase of emissions. Environmental integrity depends on two main factors:

Additionality

The CDM requires each approved project to be ‘additional’. This means that the project only went forward because of the extra financial support provided by the sale of carbon credits. Assuring that each project is additional is integral to the integrity of the CDM. Each business-as-usual (non-additional) CDM project that sells credits under the CDM allows an industrialised country to emit more than their targets without causing the equivalent emissions to be reduced in a developing country. There have been estimates that 20-70% of all CDM projects are non-additional. Very large infrastructure projects, where revenues from carbon credits makes up only a very small fraction of profits, are particularly unlikely to be additional. For example, large hydro power and coal power projects have repeatedly been shown to be business-as-usual.

Investment Analysis

The investment analysis is used to determine that the proposed project activity is not economicallyor financially attractive or feasible, without the revenue from the sale of CERs. This analysis shows that the project’s expected financial returns are below a benchmark for what is considered good investment for that particular type of project.

The investment analysis is very complicated. Therefore, the Executive Board has issued guidelines which should be used when assessing a project that applies this method. 

Barrier Analysis

The barrier analysis is used to show that there are barriers, most often expressed as risks, which prevent the project activity from going forward but do not prevent the implementation of alternatives.

Under this analysis, the additional revenues generated by the sale of carbon credits offsets that risk.

If the CDM does not alleviate the identified barriers that prevent the proposed project activity from occurring, then the project activity is not additional. 

Common Practice Analysis

The common practice analysis is a credibility check to complement the investment or barrier analysis.It is used to demonstrate that the project type is not already common practice in the relevant sector and region.

If similar activities or technologies are already being used, the proposed CDM project activity is not additional. 

Baselines

Every project needs to determine what its emissions would have been if the project was not implemented. These are called the baseline emissions. The number of credits a project receives is then calculated by subtracting the project emissions from the baseline emissions. For example, a CDM landfill gas project captures methane, a strong greenhouse gas that would otherwise escape into the atmosphere. The baseline emissions are in this case all the methane that would escape from the landfill without the added landfill gas project that will capture and burn the gas. The project emissions include the methane that ‘leaks’ (not all of the methane can be captured) and the CO2 that results from burning the methane that is captured.

The problem is that in many cases, the baselines are inflated. In some cases, project developers artificially increase baseline emissions to get more credits. In the last couple of years, the CDM has tried to standardise baseline and additionality determination in an effort to make them more objective and to simplify procedures for project developers. Standardisation can be a good approach for some sectors if designed carefully, however it is not a miracle solution. Learn more about standardisation.

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