Carbon Market Watch

For fair and effective climate protection.

The standardisation frenzy (Newsletter #16)

11 Sep 2011

In Cancun the Parties decided to push the CDM to standardise methodologies. Although in some cases a useful tool, standardisation also raises many red flags. For example, the CDM Executive Board recently approved a framework for standardisation that leaves room for interpretation and could lead to large numbers of artificial credits.

At the negotiations in Cancun late last year, the Parties asked for increased standardisation of CDM methodologies that are used for CDM projects, in an effort to simplify and streamline the CDM[1] (see Box 1 and 2). The Parties tasked the UNFCCC Secretariat and Designated National Authorities (DNAs) to come up with such new approaches. Such simplifications reduce costs and risks for project developers. Yet standardisation also runs the risk of over-crediting and allowing many projects into the CDM that are simply business-as-usual (so called ‘free-riders’).

The CDM Executive Board recently approved a framework[2] that outlines simple rules on how to develop standardisations to ensure equal treatment of cases and that explains the logic of the methodological concepts. In principle, this is a good idea but the current framework is simplistic and not sufficiently comprehensive. The risk is that it could lead to standardisations that allow large numbers of artificial credits into the CDM system. The UN’s own Methodology Panel and external stakeholders have raised a series of concerns about the applicability of the framework[3].

The topic of standardised baselines will continue to be discussed and developed by the UNFCCC Secretariat, the CDM Executive Board and by the DNAs. DNAs are currently looking at developing ‘positive lists’ of technologies that would automatically be deemed additional in their countries.

CDM Watch recommends:

  • Requiring that new standardised methodologies rigorously assess and mitigate the risk of free-riders
  • Developing much clearer guidance on how data availability and quality should be assessed
  • Developing detailed and clear guidance for the CDM Executive Board on how to set baseline and additionality thresholds.
  • Carefully analysing free riders on any positive lists put forward by DNAs for additionality determination
  • To carefully road-test the current framework before approving any standardised approaches (e.g. analyse the feasibility for various sectors and complex project types).

Box 1:

What are standardised baselines?

Approaches that determine efficiencies or emission for a whole sector or technology (not project-by-project).

Examples:

Baseline:  For CDM coal projects this is based on the efficiency of the most efficient 15% coal power plants in that country.

Additionality: A positive list is a technology-specific list that automatically deems all projects of that technology type to be additional.  The underlying rationale is usually that the technology has a low emissions rate and a very low market penetration rate.

‘Free riders’ are projects that can generate credits despite the fact that they are non-additional.

‘Lost opportunity’ are projects that would be additional but do not qualify under a standardised approach.

Both should be avoided, yet free riders are more problematic since they undermine climate goals.

Box 2: Standardisation: miracle or mayhem?

In Cancun the Parties to the Kyoto Protocol asked for increased standardisation in the CDM, arguing that it:

“could reduce transaction costs, enhance transparency, objectivity and predictability, facilitate access to the clean development mechanism, particularly with regard to underrepresented project types and regions, and scale up the abatement of greenhouse gas emissions, while ensuring environmental integrity.”

To what extent can these goals really be achieved?

Transaction costs are lowered for project developers but developing standardised methodologies requires large amounts of reliable industry data and in-depth analysis. This is expensive and it is unclear who can and should bear the risks and costs of it.

Objectivity is only increased at the stage of project evaluation. But standardised approaches still require a range of normative choices which are not objective but political in nature. DNAs are to develop such standardised approaches but in most cases they lack the capacity and also have a vested interest in developing approaches that are favorable for their country. The CDM Watch study on grid emissions factors  highlights the resulting risks.

Predictability for project developers is increased because the application of a standardised baseline is straightforward.

Facilitating access to underrepresented project types and regions may be possible in some cases but are not a given, because underrepresented regions usually lack data and capacity to develop standardised approaches.

Scale up the abatement of greenhouse gas emissions, while ensuring environmental integrity. The jury on this is out. There is no evidence that standardised approaches lead to fewer free-riders than project-based approaches.

To summarise: standardisation can be an effective policy tool for some sectors if designed careful, however it isn’t a miracle solution.