GHG Accounting Guidance Note Fuel Switch Investment Projects

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1 GHG Accounting Guidance Note Fuel Switch Investment Projects IFC CLIMATE BUSINESS GROUP SEPTEMBER 2011

2 Introduction The following is an overview guidance for IFC investment staff to conduct greenhouse gas (GHG) emission reduction calculations for fuel switch (FS) projects in IFC. For other EE-type projects, please see additional guidance notes from CBGSM. Such calculations are required in order to consider the project as mitigation or climate related and will feed into the climate-related tracking system required by management. 1 1 Previously called RE/EE tracking. KEY CONSIDERATIONS 1) This methodology is subject to refinement and expansion based on testing and implementation feedback, please visit our website for the latest version of guidance. See contact information at the bottom for more information and related questions. 2) This methodology is to be superseded by any externally accepted GHG calculation qualified for generating certified and/or verified carbon credits by an internationally recognized third party, such as the UNFCCC s Clean Development Mechanism (CDM) Executive Board. If approved as generating carbon credits, please upload the Project Design Document (in the case of CDM), or equivalent, as per the instructions in the Reporting section of the guidance note. Please note that a third party methodology must be followed in its entirety and any partial application of the methodology and assumptions is not acceptable. 3) Scopes: Net GHG calculations require inclusion of some degree of GHG lifecycle analysis (LCA), and all significant changes in GHG emissions affected by the project, regardless of ownership, are considered, per the guidelines herein. This is defined as partial lifecycle analysis in this methodology. 4) Boundary: IFC investments can often include multiple projects and facilities, both FS related and non-fs related, and the gross emissions calculation will typically capture all project components. However, for the purposes of GHG reduction calculations, project boundaries are limited to the impacts associated with the FS portion of investments only. 1 This means that all changes in GHG emissions resulting from the FS portion of the project, regardless of ownership, need to be captured, over and beyond the FS facility covered by the project. 5) With a variety of fuels available in a variety of sectors, additionality is achieved by reducing energy consumption by a target percentage reduction (see next section). Requirements: a) Project must consist of onsite process changes enabling the use of a different fuel. b) The IFC FS project must reduce associated fuel GHG emissions by at least 10%

3 tco2e/mwh c) Fuel switches are limited to fuel switches to other fuel types 2 d) For project where the FS project is part of a simultaneous project expansion, the fuel switch calculation is limited to original plant scenario and any fuel use in the expansion is excluded from the calculation. 3 In other words, the FS boundary and related production remain constant between the pre- and post-ifc scenario. e) Per the previous point, if the FS project results in a production increase due to increased efficiency within an existing plant (not due to a plant expansion), the FS GHG reduction calculation also only applies to the original level of production as any additional production is excluded from the calculation f) Conservativeness is to be followed in all calculations to address uncertainty. Given ex ante calculations often require some level of assumption, staff should assume the project options and emission factors resulting in the lowest GHG reduction in order to not overstate project GHG emission reductions. When addressing uncertainty, staff should also detail how conservativeness is being followed in their submitted calculation. 4 The GHG emission reduction methodology is illustrated in the graphic below: Baseline (Country) Project Emissions (PE) Additionality / GHGs emissions reduced 1 Anything non-fs related is considered business-as-usual, does not result in any change in GHG emissions, and excluded from the GHG reduction calculation. These emissions are captured separately by IFC gross portfolio reporting. 2 An example of a fuel switch would be switching from coal to natural gas; on the other hand, switching between two types of coal does not apply. 3 In some GHG accounting methods, production is often required to remain constant to be considered a GHG emission improvement. However, due to suppressed demand conditions in developing countries, FS measures are often implemented along with larger plant expansions and IFC should include FS measures during plant expansion where possible. Therefore, FS GHG reductions are limited to the original plant and production level and disaggregated from any production increases or expansion, as the latter are treated as business-as-usual. 4 As an example, consider an IFC project scenario displacing coal as a fuel where uncertainty exists if the new fuel will eventually be natural gas or liquefied petroleum gas (LPG), based on future market pricing. The GHG reduction calculation, in this case, would assume that LPG will be the fuel substituting coal in order to follow conservativeness, as this results in the lowest GHG reduction (natural gas is less GHG-intensive than LPG when combusted) and is least likely to overstate GHG emission reductions.

4 Method 1. IFC PROJECT EMISSIONS (PE 1 ): Calculate project emissions from sources that will change as a result of the implementation of the project. 1 A. UPSTREAM EMISSIONS: Upstream GHG emission increases can be any of the following and should be treated as described below: Construction related GHG emissions are excluded from upstream emissions. 2 Upstream manufacturing of the equipment and machinery installed or used onsite by the project are generally excluded from the calculation. The underlying assumption is that the scale of IFC FS projects will not materially change these upstream manufacturing emissions. 3 A different reasoning applies if the project is intended to achieve material market transformation, please refer to the Advisory Services (AS, forthcoming) methodology for such cases. Upstream GHG emissions resulting from the production of material and/or energy inputs from non-dedicated, third parties operations are generally excluded from the calculation. The underlying assumption is that the scale of IFC FS projects will not materially change these upstream emissions. 4 In cases were offsite GHG emissions do increase due to the IFC project, please include them in the leakage section below. B. OPERATIONAL EMISSIONS: Calculate the post-ifc operational emissions for the project. This is already an IFC GHG accounting requirement as operational emissions are mandated in idesk prior to project approval. Operational emissions are always calculated in the IFC CEET in the IFC Gross Project Emissions worksheet. Ensure to consider the following: Mobile fuel combustion in maintenance and staff vehicles Stationary fuel combustion in back-up power or other Electricity purchases from grid 1 This purpose of this methodology is to identify GHG emission sources that will change between the baseline and project scenarios due to the project activity. Emission sources that remain constant between these scenarios are therefore excluded from the calculation. 2 Construction emissions can be large in some cases (e.g. large hydro). However, if these construction emissions were annualized over the project life, they would constitute less than 1% of the GHG reduction calculation and, therefore, are excluded from the calculation. 3 The implementation (or non-implementation as in the baseline scenario) of the IFC project is assumed to not affect upstream production levels and the resulting emissions of this equipment and machinery. 4 As production increases are excluded from the GHG reduction calculation, the level of inputs will not likely change between the baseline and project scenario and, thus, should be excluded.

5 Other emission sources C. LEAKAGE: Leakage is a change in GHG emissions beyond the project boundary. It can result from displacing a source of GHG emissions off-site or causing an increase in GHG emissions at a third party operation. Use the CEET to compute any form of leakage or change in GHG emissions that occur beyond the IFC project boundary resulting from the project. For FS projects, ensure to consider the following: Activity shifting by displacing equipment offsite, energy consumption or other GHG emission sources off-site Indirect impacts affecting third party operations 5 Biomass fuels, agribusiness and forestry, and other operations with land use implications require special attention given their propensity for leakage GHG emissions Fugitive emissions (actual containers and pipeline leakage) associated with fuel transport and transfer Exclude any offsite GHG emissions that do not change between the project and baseline scenario. D. DOWNSTREAM EMISSIONS: For FS projects, downstream GHG emissions are to be accounted for as per the following: As production is often assumed to remain constant (per Requirement (e) above), often downstream GHG emissions do not change between the baseline and project scenarios and, therefore, are exclude from the GHG calculation FS projects may result in a production change, where the output type changes between the project and baseline scenario; in such a case, any increase in downstream GHG emissions are to be accounted for in the GHG reduction calculation 6 E. DISPOSAL: For these project types, GHG emissions related to the disposal of any biomass or other materials with a high level of degradable organic carbon needs to be accounted for. Otherwise, the decommissioning and disposal of the facility itself is generally neglected if any of the 5 One example may be a fuel switch to biomass boiler. The new biomass boiler feedstock may result in biomass waste as a byproduct and this increase in waste product is then shipped to a third party landfill. In this case, this increase in offsite GHG emissions, due to the IFC project, would need to be accounted for in the GHG reduction calculation. 6 Special attention needs to be paid to the oil and gas, mining, and chemical sectors where a change in outputs may have significant downstream GHG emission impacts when combusted or applied, given the variance between emission factors of each of their products.

6 following conditions apply: disposal GHG emissions are negligible; 7 comparable between the baseline scenario and the project scenario; 8 and/or not significant given IFC project timelines. 9 The Project Emissions equation is: Project Emissions (PE 1 ) 10 = Upstream Emissions+ Construction Emissions + Operational Emissions + Leakage Emissions + Downstream Emissions + Disposal Emissions F. BASELINE EMISSIONS (PE 0 ): The baseline activity is the project scenario that would have occurred in the absence of the IFC project. 11 For FS, the baseline activity is the pre-ifc scenario before the FS project was implemented. To determine baseline GHG emissions, use the CEET s Alternate Project Emissions worksheet to input baseline emission sources. Ensure to include the same emission sources as those noted in the previous section, Project Emissions, such that differences between the baseline and the project scenario can be determined. 2. GHG REDUCTION: Calculate the GHG emission reduction by subtracting the IFC Project Emissions (PE 1 ) from the Baseline Scenario Emissions (PE 0 ): GHG Reduction = Baseline Emissions (PE 0 ) - IFC Project Emissions (PE 1 ) As noted earlier, this can be done using the CEET for the first year at full production for a project, as a representative year. Annual production variation and longer periods of construction should be captured by year, as noted in the next section. 3. TIMELINE: The timeline for the project GHG emission reduction calculation starts at the Commitment Stage of the IFC Project Cycle and is limited to the term of IFC financing and not beyond. For equity and 7 If the disposed material has a low degradable organic carbon content and/or the disposal process itself does not generate significant GHG emissions (e.g. not combusted or requiring chemical processing). 8 If the disposal of materials in the IFC project generates the same or lower GHG emissions than equipment and materials in the baseline scenario, then disposal GHG emissions can be neglected. As an example, disposal of a natural gas fired boiler would generate the same or less GHG emissions than the disposal of a coal fired boiler. 9 If any disposal GHG emissions were annualized over the project life, they would constitute less than 1% of the GHG reduction calculation and, therefore, are neglected. 10 Units are in tonnes of CO2e per year or tco2e/yr. 11 For example, if a coal fired boiler is being replaced by a natural gas boiler, then coal fired generation is the baseline activity.

7 other financial products with indefinite timelines, a standardized timeline of 10 years should be assumed to be conservative. 12 Account for all GHG emission reductions and other associated impacts during the timeline ILLUSTRATIVE EXAMPLE: In the example below, the difference between the baseline and the project emissions (the GHG reduction) is illustrated: Assumptions: 1. The FS project consists of upgrading two boilers to use natural gas instead of fuel oil 2. Post-IFC project emissions total 13,476 tco2e/yr with both boilers consuming a total of 5,000 tonnes of natural gas (120 TJ) 3. Baseline, pre-ifc emissions are 20,077 tco2e/yr with two boilers consuming 6,400 tonnes of fuel oil (129.3 TJ) 4. Leakage due to the transmission of natural gas to the project site is attributable to project and results in 59 tcoe/yr from fugitive emissions 5. Loan term is equal to 7 years 6. The project meets the 10% GHG reduction threshold as 6,542 tco2e/yr constitutes a 33% GHG reduction per annum GHG Abatement Timeline yr-1 yr-2 yr-3 yr-4 yr-5 yr-6 yr-7 yr-8 yr-9 yr-10 (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) (tco2e) Project Emissions 13,535 13,535 13,535 13,535 13,535 13,535 13,535 13,535 13,535 13,535 Operational Emissions 13,476 13,476 13,476 13,476 13,476 13,476 13,476 13,476 13,476 13,476 Leakage Baseline Emissions 20,077 20,077 20,077 20,077 20,077 20,077 20,077 20,077 20,077 20,077 GHG Reduction (6,542) (6,542) (6,542) (6,542) (6,542) (6,542) (6,542) (6,542) (6,542) (6,542) Per the above example, the total GHG emission reduction over the 7-year timeline is 45,794 tco2e and, therefore, the annual average GHG emission reduction for this project is 6,542 tco2e/yr (45,794 tco2e divided by 7 years). 12 Beyond IFC financing, implementation assistance, and supervision, we have no assurance that any GHG reductions are actually taking place. This is consistent with IFC s gross emissions accounting methodology and is also consistent with internationally accepted methodologies, such as CDM, where one-time net calculations do not extend beyond 10 years. 13 Grace periods and other operational delays before the project is implemented show up as the baseline being equal to the project scenario (GHG reduction equal to zero) as anything before implementation is business-asusual.

8 5. REPORTING: Please use the GHG Emission Reduction Calculation Template 14 to record GHG reduction calculations and upload it to the project's idesk GHG Emissions tab, under the "attach" section. This is to support any project GHG reduction claims and is required for any project that is to be considered "climate-related" for the purposes of climate-related tracking. The CEET is to be used to compare the Project Emissions (in the IFC Gross Project Emissions worksheet) to the Baseline Emissions (in the Alternate Project Emissions worksheet), illustrating variations between the two scenarios. While the CEET will not capture annual variations, a representative year will suffice for peer review. 14

9 IFC Climate Business Group 2121 Pennsylvania Avenue, NW Washington, DC Lucas Broussard Sabin Basnyat