A new study commissioned by CDM Watch and published today (15 February) reveals that electricity-related projects implemented in China and India under the UNFCCC Clean Development Mechanism (CDM) are over-credited due to inflated grid emissions factors. This over-crediting is estimated at 11 million credits by the end of 2012, about 2.5% of total CER volume for these projects.

CDM projects that replace grid electricity (e.g. a wind farm or a hydro dam) calculate their emissions credits (CERs) on the basis of the difference between the emission factor of the electricity grid (the so-called grid emission factor, or grid EF) and the project emission factor, multiplied by the amount of electricity produced. There is a detailed set of UNFCCC rules defining how the grid EF should be calculated and which data are acceptable.

The higher the grid EF, the more credits a project can receive. For many host countries, these grid EFs are published by the Designated National Authority (DNA), which is responsible for approving CDM projects.

Because a high grid EF leads to a competitive advantage for project developers, DNAs may have an incentive to exaggerate grid EF values. Yet the current CDM rules do not require that a DNA-published grid EF be validated by an independent third-party auditor (DOEs). On the contrary, in 2010, the CDM Executive Board (CDM EB) rejected a proposal to make such audits mandatory after a heated debate. Thus the grid EFs do not currently undergo additional scrutiny once published by the host country DNA.

CDM Watch commissioned a new study by Perspectives that looks at the reliability of these grid factors published by DNAs. The study shows that most of the 20 countries that have published grid EFs do not follow the UNFCCC rules on how to establish such grid EFs or that the documents provide so little information that it is impossible to establish the quality of the grid EFs.

The study examined the Chinese and Indian grid EFs in more detail and estimates that electricity-related projects registered in China and India between 2007 and today could receive approximately 11 million CERs more than would have been the case with correct application of the rules. This represents about 2.5% of total CER volume for these projects.

Why are average grid emissions factors (EFs) important? The EFs define how much CO2 per kWh produced would be emitted if the project was not built. The EF is used, together with the project’s emissions, to calculate the number of CERs a project can get. The higher the EF, the more credits a project can receive (and the more revenue a country will make if it taxes CERs, as is the case in China, for example).

Here is an example to illustrate the effects of inflated EFs: if a grid emission factor is stated to be 800 kg of CO2 per MWh but in reality the number is more like 750 kg of CO2 per MWh, each renewable energy project would earn 50 CERs more per 1000 MWh it produces than it actually should. This adds up: in this example, a wind farm that produces 20,000 MWh of electricity per year would earn 1000 more CERs because the EF is inflated.

Action by the Board:

To address these shortcomings, CDM Watch recommends immediate action, requiring:

• Independent validation of grid EFs.
• The use of default values for power plant efficiencies for all power plants for which data is not published.
• Inclusion of all non-CDM renewable power plants.
• Retroactive application of a revised grid EF if the grid EF used is found to be inconsistent with the Tool to calculate the emission factor for an electricity system.