Joint Implementation and Clean Development Mechanism projects

Transcription

1 Joint Implementation and Clean Development Mechanism projects Manual for project developers Version 1 May 2002

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3 Manual for Project Developers Version 1 Page i ACKNOWLEDGEMENTS The current Manual - Joint Implementation and Clean Development Mechanism Projects Manual for Project Developers has been developed by NIRAS and EcoSecurities for the. The work has been carried out in close consultation with relevant stakeholders from the industry sector, the energy sector, governmental organisations, research organisations and NGO s. The stakeholders have commented on 5 working drafts of the Manual and given valuable constructive input to the work. We thank the following organisations and companies for their active participation in the stakeholder group: Association of Danish Energy Companies Confederation of Danish Industries DONG Elkraft System a.m.b.a. Energi E2 A/S Elsam A/S Forum for Energy and Development Ministry of Finance Ministry of Foreign Affairs Ministry of the Environment The Danish International Investment Funds The Export Credit Fund UNEP UCCEE/Risø National Laboratory WWF Verdensnaturfonden We would like to thank Lasse Ringius, UNEP UCCEE/Risø National Laboratory; Mette Nedergaard, WWF; Erik Tang, Ministry of Environment and Mette Camer Buch, Marie-Louise Lemgart and Ulla Vestergård Rasmussen, all from the Danish Energy Authority, for their active contribution in the two working group meetings on baseline issues. Jane Ellis from the OECD secretariat also gave very useful comments in the process. The Project was managed by Mette Cramer Buch ( mcb@ens.dk) of the Danish Energy Authority, and governed by a steering committee including representatives from the Danish Energy Agency and the Danish Environmental Protection Agency. The steering committee was chaired by Hans Jürgen Stehr ( hjs@ens.dk) of the Danish Energy Agency. Further questions about the manual should be directed to Mette Cramer Buch. ISBN

4 Manual for Project Developers Version 1 Page ii DEFINITIONS AA AAU AIJ, Activities Implemented Jointly Annex I countries Annex B countries Annex I or Annex B? Baseline scenario Baseline Study BAT Carbon Offset Assigned Amount the amount of GHG emission that an Annex B country may emit in the Commitment Period Assigned Amount Unit tradable units of the Assigned Amount of an Annex B country as issued pursuant to the rules of article 17 of the Kyoto Protocol, expressed as one metric ton of CO 2 equivalent. In the first Conference of the Parties (COP 1) to the UNFCCC held in 1995 in Berlin a project pilot phase was created, during which bilateral GHG mitigation projects were called Activities Implemented Jointly (AIJ). During the AIJ Pilot Phase, projects were conducted with the objective of establishing experience, but without allowing carbon credit transfer between countries. These are the industrialised countries and economies in transition listed in Annex I of the UNFCCC. Their responsibilities under the Convention are various, and include a non-binding commitment to reducing their GHG emissions relative to 1990 levels by the year These are the emissions-capped industrialised countries and economies in transition listed in Annex B of the Kyoto Protocol. Legally-binding emission reduction obligations for Annex B countries range from an 8% decrease (e.g., EC) to 10% increase (Iceland) of 1990 levels by the first commitment period of the Protocol, In practice, Annex I of the Convention and Annex B of the Protocol are used almost interchangeably. However, strictly speaking, it is the Annex I countries, which can invest in JI/CDM projects as well as host JI projects, and non-annex I countries, which can host CDM projects, even though it is the Annex B countries, which have the emission reduction obligations under the Protocol. Note that Belarussia and Turkey are listed in Annex I but not Annex B; and that Croatia, Liechtenstein, Monaco and Slovenia are listed in Annex B but not Annex I. A description of the most likely future development in the considered GHG emitting or sequestrating system without the JI/CDM project. A study including the construction of a baseline scenario, an emission baseline, an assessment of project emissions and a calculation of emission reductions. Best Available Technology. Term used in a variety of contexts, most commonly either to mean the output of carbon sequestration projects in the for-

5 Manual for Project Developers Version 1 Page iii estry sector, or more generally to refer to the output of any climate change mitigation project Carbon Credit Carbon Purchasing Agreement CDM CER Certification COP/ MOP Commitment Period Crediting period DERSA Determination EIA Emission baseline Environmental additionality ERU Eru-PT Emissions Trading Generic term for the claimed carbon benefits arising from project-level activities. One credit is equal to one ton of CO 2 equivalent. Agreement between buyer and seller of emission reductions in which the conditions of the sale of carbon credits are defined. Clean Development Mechanism; a mechanism introduced by the Kyoto Protocol governing project-level carbon credit transactions between Annex I and non-annex I countries Certified Emission Reductions; the terminology for emission reductions generated under the CDM The written assurance by an OE that during a specific time period a CDM project activity achieved the GHG emission reductions as verified. Conference of the Parties to the Framework Convention on Climate Change, or Meeting of the Parties once the Kyoto Protocol has been ratified. Period for which the Parties included in Annex B of the Kyoto Protocol have agreed that their aggregate GHG emissions will not exceed their assigned amounts, equal to the period The fixed and approved period over which emission reductions in a specific project can be generated and during which no adjustments to the baseline will take place. Danish Emission Reduction System Administration The process of evaluation by an IE as to whether a JI project and the ensuing GHG emission reductions meet the relevant requirements of JI. Environmental Impact Assessment, which is an assessment of the impact that the project will have on the environment. The GHG emissions occurring in the baseline scenario. The requirements that project emission reductions have to be additional to what otherwise would have occurred in absence of the project. Emission Reduction Unit the technical term for the GHG emission reduction output of JI projects. The Emission Reduction Unit Procurement Tender for JI projects from the Dutch government. Since the first Eru-PT tender launched in 2000, the Dutch government has set up a programme called carboncredits.nl under which new procurement tenders have been launched for JI and CDM. Mechanism introduced by the Kyoto Protocol allowing the

6 Manual for Project Developers Version 1 Page iv (ET) Executive Board for the CDM (EB) Externalities trade of surplus emission allowances between Annex I countries. Board that will supervise the CDM under the authority of the COP/MOP. It will make further recommendations on modalities and procedures for the CDM. Project impacts that are caused by the implementation of the project and are outside the boundaries of the project GHG Greenhouse gas; gases, principally carbon dioxide (CO 2 ), which contribute to climate change. The other gases are Methane (CH4), Nitrous Oxide (N2O), Hydrofluorcarbons (HFCs), Perfluorcarbons (PFCs) and Sulphurhexafluoride (SF6) Host country Independent Entity (IE) JI Kyoto Protocol (KP) Leakage Marrakech Accords (MA) MOU Monitoring plan Non Annex I (or non- Annex B) countries Operational Entity (OE) Party PCF PDD Country in which the JI or CDM project is implemented A legal entity that has been accredited by the JI Supervisory Board to perform all necessary functions relevant to the determination and verification of ERUs generated by JI projects Joint Implementation, as referred to in Article 6 of the Kyoto Protocol. JI refers to climate change mitigation projects implemented between two Annex I countries. JI allows for the creation, acquisition and transfer of ERUs. International legal instrument on climate change containing emission reduction commitments for Annex I countries The net change of anthropogenic GHG emissions which occur outside the project boundary, and that are measurable/calculable and attributable to the project activity Legal text elaborating on the Kyoto Protocol, representing the decisions and actions adopted by the COP at its seventh session (COP.7). See Memorandum of Understanding Plan describing how monitoring of emission reductions will be realised. The monitoring plan forms a part of the PDD. Countries with no emission reduction commitments under the Kyoto Protocol. A legal entity that has been accredited by the CDM Executive Board to perform validation, verification and certification functions for CDM projects. Party to the Kyoto Protocol, which are the countries that have ratified the Kyoto Protocol. Prototype Carbon Fund of the World Bank Project Design Document, which refers to all documents to be submitted to an Operational Entity for validation or to an Independent Entity for determination

7 Manual for Project Developers Version 1 Page v PIN Project boundary Project Developer Registration RMU Secretariat Sink Supervisory Committee for JI (SC) Supplementarity TCO 2 e, tonnes of carbon dioxide equivalent UNFCCC Validation Verification Project Idea Note, a project information form that needs to be filled out for submitting projects to the Prototype Carbon Fund from the World Bank. Also used in this manual for the voluntary project information form to be submitted to DERSA The notional boundaries set around the project within which the impacts and effects of the project on GHG emissions should be considered and quantified. The term Project Developer in this manual refers to the organisation developing a JI or CDM project. This is not necessarily the same organisation that is developing the physical project. Formal acceptance of a validated JI or CDM project by the appropriate authorities. Removal Unit a new carbon unit created at COP7 in Marrakech, relating to credits generated from sequestration activities, where one unit is equal to one metric ton of CO 2 equivalent. Please note that RMUs are only related to Annex I countries. The Secretariat of the UNFCCC (sometimes also referred to as the Secretariat of the Parties), located in Bonn, Germany. Its primary role is to provide administrative support to the UNFCCC process and the JI Supervisory Committee and the CDM Executive Board. A process, activity or mechanism, which removes anthropogenic GHG from the atmosphere. The Supervisory Committee will supervise JI under the authority of the COP/MOP. The Committee does not exist yet. It will make further recommendations on modalities and procedures for JI. Eligibility criterion for JI and CDM projects, use of the flexible mechanisms by Annex I countries. It means that projects must be supplemental to domestic mitigation action by Annex I countries. Units for carbon dioxide equivalent calculations. One ton of CO 2 equivalent is equal to one ERU or CER. United Nations Framework Convention on Climate Change. The process of independent evaluation of a project activity by an OE against the requirements of CDM. The periodic independent review and ex post determination by the OE or IE of the monitored GHG emission reductions that have occurred as a result of the JI/CDM project activity during the verification period.

8 Manual for Project Developers Version 1 Page vi 1. INTRODUCTION SCOPE OF THE MANUAL READING GUIDE BACKGROUND OF JI AND CDM POLICY BACKGROUND AND CARBON MARKET EVOLUTION THE KYOTO PROTOCOL AND THE MARRAKECH ACCORDS The flexible mechanisms JI and CDM The Clean Development Mechanism Joint Implementation (JI) THE JI AND CDM PROJECT CYCLE AND PARTICIPANTS INVOLVED The JI and CDM project cycle step-by-step Project cycle small-scale projects under the CDM Legal contracts COSTS AND REVENUES OF JI/CDM PROJECTS COST TO DEVELOP A JI AND CDM PROJECT CREDIT OWNERSHIP AND CREDIT SHARING ADMINISTRATIVE CHARGES AND OTHER COSTS IMPOSED BY INTERNATIONAL REGULATORY AUTHORITIES RISKS AND UNCERTAINTIES INITIAL PROJECT SCREENING ELIGIBILITY CRITERIA FOR JI AND CDM PROJECTS Key eligibility criteria TOOLS FOR INITIAL FEASIBILITY ASSESSMENT Eligible project categories Eligible project developers Eligible technologies Eligible host countries Countries that are not a party to the Kyoto Protocol PROJECT IDEA NOTE (PIN) PROJECT DESIGN DOCUMENT (PDD) DESCRIPTION OF THE PROJECT KEY QUALITATIVE CRITERIA IN THE PDD Additionality Non-diversion of ODA for CDM projects Sustainable development No sustainability criteria in host country Environmental Impacts:...37

9 Manual for Project Developers Version 1 Page vii 5.3 PUBLIC COMMENTS Invitation of local stakeholders Utilisation of existing procedures for public consultation in host country Procedures where there are no public consultation requirements in host country CREDITING PERIOD MONITORING PLAN HOST COUNTRY APPROVAL HOST APPROVAL FOR SECOND TRACK JI PROJECTS CREDIT SHARING BASELINE STUDY PROJECT CHARACTERISTICS Project categories for baseline development DEFINITION OF THE PROJECT BOUNDARY Geographic level Activity level EMISSION BASELINE Steps in emission baseline development Step 1: Set the boundaries Step 2: Selection of the most appropriate baseline methodology Baseline based on actual or historical data Baseline based on economically attractive technology Baseline based on average emissions of similar activities Selection of the method Step 3: Baseline conditions Step 4: Calculation of baseline emissions Emission factors The calculations PROJECT EMISSIONS Calculation of project emissions LEAKAGE NET EMISSION REDUCTIONS CONCLUSION VALIDATION COMMENTS FROM STAKEHOLDERS BY IE/OE Proprietary and confidential information REGISTRATION OF THE PROJECT REVIEW OF PROPOSED ACTIVITY...71

10 Manual for Project Developers Version 1 Page viii 9.2 REGISTRATION OF JI PROJECTS REGISTRATION OF CDM PROJECTS REGISTRATION OF THE PROJECT WITH DERSA MONITORING/ VERIFICATION / CERTIFICATION MONITORING REQUIREMENTS VERIFICATION CERTIFICATION OF EMISSION REDUCTIONS FROM CDM PROJECTS Issuance of CERs from CDM projects ISSUANCE OF ERUS FROM JI PROJECTS REFERENCES...75 ANNEX 1. TABLES AND FIGURES BASELINE CHAPTER...77

11 Manual for Project Developers Version 1 Page 1 1. INTRODUCTION The objective of this manual is to outline the process by which Joint implementation (JI) projects and Clean Development Mechanism (CDM) projects can be developed and registered with the Danish government. It is intended to give the user an understanding of the key issues, and to guide the user on the steps and criteria required for developing a JI and CDM project. The guidelines of this manual are generic and applicable to all types of JI and CDM projects, unless otherwise indicated. This manual will be revised continually as the COP/MOP adopts further clarifications of the rules. The guidelines and criteria in this manual are based on the most recent decisions taken by the seventh Conference of the Parties (COP-7) held in Marrakech, Morocco in November Moreover, existing guidelines and regulations from the Prototype Carbon Fund (PCF) of the World Bank, the Dutch Eru-PT and CERUPT programmes and the Finnish JI and CDM programme have also been used to interpret the rules of the Kyoto Protocol (KP) and the Marrakech Accords. 1.1 Scope of the Manual In order to be eligible for JI and CDM, a project has to be assessed against the following criteria: Requirements for JI and CDM as included in Articles 6 and 12 of the Kyoto Protocol; The guidelines and requirements for JI and CDM as included in the Marrakech Accords; Host country climate policy, laws and regulations; Regulations of the country in which the emission reductions are registered or sold in to, in this case Denmark. In order to start the development and registration of JI and CDM projects it is necessary for the project developer to translate the existing rules into workable criteria for a specific project. This manual aims to assist in this by stating as clearly as possible, which criteria and what information is required as a consequence of the regulations in the Kyoto Protocol and the Marrakech Accords. These rules are interpreted in a conservative and strict way in order to guarantee the quality of the emission reductions achieved and registered, and should be seen as a protection of the project developer and the Danish state against disqualification of the credits once the rules are finalised by the international bodies. This Manual is only applicable to JI projects that follow the so-called second track. If a JI project activity will be implemented in a host country that meets the criteria for the JI first track approach, then the rules of the host country should apply instead of the guidelines as included in this Manual (see section for further information). JI

12 Manual for Project Developers Version 1 Page 2 projects that follow the so-called JI first track approach can also be accepted by the Danish Government as JI projects and are thus not exempted from registration with the Danish Government. 1.2 Reading guide The structure of this manual is as follows. Chapter 2 provides a background description of JI and CDM, including an overview of the JI/CDM project cycle. Chapter 3 provides information about transaction costs for developing JI/CDM projects as well as information on revenues from emission reductions. Preliminary indicators and guidelines on how to assess the eligibility of the project under JI/CDM are described in Chapter 4. It gives some examples of which project categories, countries, technologies, etc. are likely to be eligible under JI and CDM. If a project passes the pre-qualification phase, more detailed information and documents on the project are required. Chapter 5 provides further guidance on how to fill out a Project Design Document (PDD) by going into detail on the various components to be included in the PDD. Chapter 6 discusses the issue of host country approval and public comments. The Baseline Study forms an important component of the PDD and is therefore discussed separately in Chapter 7. The final formal steps of validation, registration and verification of the project are discussed in Chapters The Manual makes use of Notes and Examples to further illustrate an option and guide the user. These are presented in boxes or throughout the different parts of this Manual. The table below illustrates the keys used in this Manual and their functions. Keys L Background Information Note: Examples Function General Background Information to the user. Mainly presented in boxes. Notes ask for specific attention or provide some further explanation on a specific issue. Examples are included to better illustrate the options that are presented. These are mainly presented in boxes.

13 Manual for Project Developers Version 1 Page 3 2. BACKGROUND OF JI AND CDM This section of the Manual includes definitions of the main concepts of JI and CDM and gives a global overview of the project requirements for JI/CDM projects. Further, this section of the Manual describes briefly each step of the project cycle for developing a JI and CDM project. 2.1 Policy background and carbon market evolution On 11 December 1990, the 45th session of the UN General Assembly adopted a resolution establishing the inter-governmental negotiating committee for a United Nations Framework Convention on Climate Change (UNFCCC). The objective of the UNFCCC is stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system (article 2 of the UNFCCC). The completed UNFCCC was presented at the United Nations Conference on Environment and Development (UNCED) in Rio, 1992, and has since been ratified by over 170 countries. The Convention came into force in early In 1995, at the first Conference of the Parties (COP1) of the UNFCCC, the Parties adopted a programme to gain experience with developing emission reduction projects in Central and Eastern Europe and developing countries. These pilot projects are called the Activities Implemented Jointly or AIJ Pilot Phase. AIJ projects were to be conducted in order to establish protocols and experience, but without any formal carbon crediting allowed between developed and developing countries. This manual includes some case studies of the AIJ pilot phase, described in Appendix The Kyoto Protocol and the Marrakech Accords In December 1997, the Kyoto Protocol was adopted during COP3 of the UNFCCC. The most important aspect of the Kyoto Protocol are the binding commitments by developed countries and economies in transition to reduce their GHG emissions by at least 5% compared to 1990 levels in the commitment period, The Protocol also approved the use of three Kyoto mechanisms for facilitating the achievement of GHG emission reduction targets. These are emissions trading (ET), Joint Implementation (JI), and the Clean Development Mechanism (CDM). Emissions Trading refers to Article 17 of the Kyoto Protocol and allow for emissionscapped Annex B countries to transfer among themselves portions of their Assigned Amounts (AAs) of GHG emissions. The mechanism of Emissions Trading is not project specific and will not be further discussed in this Manual. The criteria for the Protocol entering into force have not yet been met. The Kyoto Protocol was opened for signature for one year starting 16 March 1998 and 84 countries have signed the Protocol. Signature indicates support for the Protocol, whilst ratifica-

14 Manual for Project Developers Version 1 Page 4 tion commits that country to implement it. Most of the countries that have currently ratified the Protocol are small island states and coastal countries, likely to be impacted significantly by climate change. The Protocol will enter into force 90 days after it has been ratified by at least 55 Parties to the UNFCCC, including developed countries representing at least 55% of the total 1990 CO 2 emissions from this group. In the meantime, governments will continue to carry out their commitments under the UNFCCC, and work on questions related to the implementation of the Kyoto Protocol at annual COP and bi-annual subsidiary body meetings. Once the Kyoto Protocol enters into force, the Conference of the Parties (COP) of the UNFCCC will also serve as the formal Meeting of the Parties (MOP) for the Kyoto Protocol. The most recent meeting of the COP took place in Marrakech, Morocco, in November During this seventh conference the principles, modalities and rules of the Kyoto Protocol, including the JI and CDM mechanisms were further elaborated and agreed upon by the Conference of the Parties (COP). The rules agreed upon are written down in what is called the Marrakech Accords. The Kyoto Protocol and the Marrakech Accords form the basis for subsequent chapters in this manual. Where relevant, the manual includes specific reference to the text in the Marrakech Accords, justifying a particular requirement or procedure The flexible mechanisms JI and CDM This section includes a brief explanation of the two project based mechanisms that were introduced in the Kyoto Protocol and elaborated upon in the following Conferences of the Parties, including COP-7 in Marrakech The Clean Development Mechanism The Clean Development Mechanism (CDM) is defined in Article 12 of the Kyoto Protocol. It involves climate change mitigation activities undertaken between Annex I countries and non-annex I countries. The CDM is the only mechanism in the Kyoto Protocol under which developing countries can engage in emissions reduction activities. As defined by the Protocol, the purpose of the CDM is twofold: (a) Help non-annex I countries achieve sustainable development; and (b) Help Annex I countries to achieve emission reductions that can be used towards their commitments to mitigate their GHG emissions. Non-Annex I countries are supposed to gain the economic, developmental and environmental benefits from implemented CDM projects that generate Certified Emission Reductions (CERs) for export.

15 Manual for Project Developers Version 1 Page 5 An important facet of the CDM is that a project activity starting as of the year 2000 shall be eligible for validation and registration as a CDM project, if registered before 31 December This means that CERs are bankable from the inception of the CDM and can thus be generated prior to 2008, which is a significant difference from ERUs (see below). This might create a strong incentive for those in a position to act now to engage in CDM projects as early as possible Joint Implementation (JI) Joint Implementation is defined in Article 6 of the Kyoto Protocol. JI involves climate change mitigation projects implemented between two Annex I countries and allows for the creation, acquisition and transfer of emission reduction units or ERUs. This implies that JI activities can be hosted by any Annex I country. However, in practice JI projects are more likely to be hosted in countries in Central and Eastern Europe. Projects starting as of the year 2000 may be eligible as a JI project, but ERUs can only be issued for a crediting period starting after 2008, which implies that emission reductions generated prior to 2008 cannot be transferred or acquired as ERUs. 1 Emission Reductions from JI projects prior to 2008 As stated in the Marrakech Accords it is possible to start JI projects from the year 2000 onwards. However, it is only possible to trade emission reductions as ERUs under the JI mechanism if these are generated in the commitment period from This implies that emission reductions from a JI project generated prior to 2008, cannot be verified and traded as ERUs. This does not mean that emission reductions generated prior to 2008 cannot secure any value at all. The Kyoto Protocol and the Marrakech Accords leave the option open to transact and transfer these emission reductions as AAUs under Article 17 of the Protocol (Emissions Trading). It is important to note that these pre-2008 emission reductions are not transacted and transferred under JI. In practice this implies that claims and transactions of emission reductions that were generated from a JI project prior to 2008, have to be negotiated between the host, the investor country and the project developer. The appropriate authorities of the two Annex I countries involved will have to decide upon and set the conditions under which emission reductions generated prior to 2008 can be traded as AAUs. Most likely only those host countries that are certain to have a surplus of AAUs will agree to this form of transaction for emission reductions from JI projects generated prior to It should be noted that in order to transfer and transact emissions transactions as AAUs, the Annex I countries involved have to meet all the eligibility criteria for participating in Emissions Trading. These are the same as the eligibility criteria for participation in JI first track projects (see section below). 1 CP.7, Draft decision article 6, paragraph 5. 2 And once applicable, a second and/or subsequent commitment periods.

16 Manual for Project Developers Version 1 Page 6 Twin track approach for JI For JI projects a so-called twin-track approach has been adopted. The twin-track approach suggests that there are two separate approaches (first and second track JI projects) for countries hosting a JI project, depending on the extent to which a Party meets the eligibility criteria for first track JI projects. The eligibility requirements that have to be met in order to transfer and/or acquire ERUs under JI track 1 is that an Annex I country needs to: (a) Be a Party to the Kyoto Protocol; (b) Calculate and record its Assigned Amounts; (c) Have in place a national registry; (d) Have in place a national system for estimating GHG emissions; 3 (e) Submit annually the most recent required GHG inventory; 4 (f) Submit supplementary information on its Assigned Amount. A country does not meet the requirements listed under d) to f) can still participate and host second track JI projects 5. For those countries in full compliance with the participation criteria for the first track JI projects (criteria a to f) there will be no internationally imposed requirements for JI, except additionality. Currently, it appears that none of the Annex I countries have met the requirements for the first track JI approach and thus all projects have to follow the second track approach. It is expected that the earliest date that countries are likely to be eligible for following JI track 1 projects is JI projects under the first track can be verified according to the criteria for JI as designed by and applicable in the host country. These are likely to be different for each country. First track JI projects do not have to follow the verification procedures for JI to be designed by the Supervisory Committee. Therefore, this manual is not applicable to design first track JI projects. Subsequently, when referred to JI in the following chapters, this refers to second track JI projects, unless stated otherwise. For projects in countries not in compliance with the requirements for monitoring and reporting of GHG emissions (criteria d, e and f above), the projects will have to follow the eligibility requirements and procedures established for the JI second track. The rules for JI second track projects in the Marrakech Accords are less clear than the rules for CDM, and the JI Supervisory Committee designing the rules for second track JI is unlikely to be in place before Therefore, unless stated otherwise, in this manual second track JI projects have to follow similar rules and procedures as the CDM. It should be pointed out that whilst all Annex I countries can potentially host JI projects it is only those that are Economies in Transition Central and Eastern Europe, and the Former Soviet Union countries that are actively promoting themselves as hosts for JI projects. 3 Article 5 paragraph 1 Kyoto Protocol 4 Article 7 Kyoto Protocol 5 CP.7 Draft decision article 6/Annex D, paragraph 21, 23 and 24

17 Manual for Project Developers Version 1 Page The JI and CDM project cycle and participants involved Figure 1 and 2 present an overview of the key components of the JI and CDM project cycle and the international and domestic participants involved. The five primary participants involved in the project cycle are: 1. Project developer; 2. Danish Emission Reduction System Administration (DERSA). DERSA is the adopted acronym for the combined activities of the Danish national administration in relation to JI/CDM; 3. Host country government; country in which JI/CDM activity will be implemented; 4. Operational Entity (for CDM projects)/ Independent Entity (for JI projects); entities carrying out validation/determination and verification activities for CDM and JI projects respectively; 5. Executive Board (for CDM projects)/ Supervisory Committee (for JI projects). 6 Each of the above participants is responsible for different tasks involved in implementing and administering JI and CDM projects. The following sections briefly describe each of the steps that have to be taken for generating carbon credits under JI second track and the CDM and which participants are involved. This is presented in Figures 1 and 2 and Table 1 and 2 below The JI and CDM project cycle step-by-step The project cycle can be split into two phases, the first one being the project design phase and the second phase being the project operation phase. The project design phase refers to the phase prior to the implementation of the physical project, and the project operation phase refers to the phase in the project cycle where the project has started to operate (i.e. implementation and commissioning of the project). Figure 1 and 2 show the project cycle for CDM and second track JI projects respectively, split up in the cycle for the project design phase (figures 1.a and 2.a) and the project cycle at the stage of project operation (figures 1.b and 2.b). Then each of the steps presented in the figures are described in more detail in Tables 1 and 2. The tables also give an indication of the time that each of the steps can take and where more information on the subject can be found in this Manual. It should be noted that the time estimated for some of the steps could be highly variable and depends on project types and location. Note: it is recommended to check the JI track status of a host country with DERSA or the Secretariat. 6 The Executive Board was established at COP-7 in Marrakech, November The Supervisory Committee will be established at the next COP/MOP, i.e. the first meeting of the Parties after the Kyoto Protocol has been ratified and entered into force. The EU plans to ratify the Protocol by June 2002, if Japan and Russia are following the Protocol could enter into force before the end of 2002.

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19 Manual for Project Developers Version 1 Page 9 Figure 1.a Project Cycle for CDM projects: Project Design Project Proponent / Project developer Host country Danish Emission Reduction System Administion Operational Entity (OE) Executive Board (EB) Project Design Phase Step 1: CDM project idea, and project definition. Step 2 : Prepration of Project Idea Note (PIN) Pre-screening of eligibility Pre-screening of eligibility of the proposed Project Negative Step 4-5 : Preparation of the Project Design Document, including - Project Description - Additionality - Public funding - Sust. development assessment - Analysis Environm impacts - Public Comments - Crediting period Approval of Project in written form Positive Step 3: Opinion on the PIN Possible review of PDD by DERSA Step 6 : Validation of PDD and other documents by an OE Step 8: Submission of validated reports to EB Step 9: Possible Review by EB Registration of the Project with DERSA Step 10: Registration of the Project with the EB

20 Manual for Project Developers Version 1 Page 10 Figure 1.b Project Cycle for CDM projects continued: Project operation Project Proponent / Project developer Danish Emission Host country Reduction System Administion (DERSA) Project Operation Operational Entity (OE) Executive Board (EB) Step 1-2: Monitoring of the project performance and submission of Monitoring results and report to OE Step 3: Verification by Operational Entity (OE) Submission of Certification report to EB Step 4: Possible Review by EB Registration of the CERs Registration of the CERs in the Register Step 5: Issue CERs

21 Manual for Project Developers Version 1 Page 11 Figure 2.a Project Cycle for JI second track projects: Project Design Project Proponent / Project developer Host country Danish Emission Reduction System Administion (DERSA) Project Design Phase Independent Entity (IE) JI Supervisory Committee (SC) Step 1: JI project idea, and project definition Step 2: Prepration of Project Idea Note (PIN) Pre-Screening of Eligibility Pre-screening of eligibility of the proposed Project Negative Step 4-5: Preparation ofproject DesignDocument,including - Project Desciption - Additionality assessment - Baseline Study - Monitoring Plan - Approval of the host and investor governments Undertake Environmental Impact analysis or Assesment Positive Step 3: Opinion on the PIN Possible review of PDD by DERSA Step 6-7: Determination of the PDD and other documents by an IE Submission of determination reports to SC Step 8: Possible Review by SC Registration of the Project with Host Country Registration of the Project with DERSA Step 9: Determination of the Project confirmed by SC

22 Manual for Project Developers Version 1 Page 12 Figure 2.b Project Cycle for JI second track projects continued: Project operation Project Proponent / Project developer Host country Danish Emission Reduction System Administration Independent Entity (IE) JI Supervisory Committee (SC) Project Operation Step 1-2 : Monitoring of the project performance and submission of Monitoring results and report to IE Step 3 : Project Verification by Independent Entity (IE) IE Submits of Verification Report to SC Step 4 : Possible Review by SC Verified ERUs recorded in Host Governments National Registry Step 5 : SC confirms emission reduction verification by OE Issue ERUs ERU transfer recorded in the National Registry

23 Manual for Project Developers Version 1 Page 13 Table 1: Steps in project design phase Steps project design phase Time Further guidance see Section Step 1: Identification of project idea by project developer and an initial Depends on project and partners Chapter 3 and evaluation of the eligibility and feasibility of developing the project as a JI involved etc. or CDM project. Step 2: Project developer fills out a Project Idea Note (PIN) and submits it to DERSA. The assessment of the PIN by DERSA should be considered as an extra service by the state to assist a project developer in deciding whether to continue the development of their project under JI/CDM. 1 5 days to prepare the PIN Section and Annex 1 Step 3: DERSA assesses the PIN document and provides an opinion on the project eligibility. If the answer is positive, continue with step 4. If the opinion is negative, adjust the project idea according to the comments provided or reconsider continuation. 4 weeks for response from DERSA Step 4: Project developer has to carry out the following: a) Develop Project Design Document (PDD). 7 b) Seek and apply for host country approval. (a) Invite stakeholders for comments on the PDD 8 a) working days b) 1 and 10 working days for project developer and 1 week up to 3 months to receive response from host country. c) 2 4 weeks a) Chapters 5 and 7 b) Chapter 6 c) Chapter 6 Step 5: Project developer submits PDD, host country approval letter, local 1 working day See Chapters 5 and 6 7 Note that the content of the PDD as required in the Marrakech Accords is different for JI and CDM projects. 8 This is not required for JI projects in the Marrakech Accords.

24 Manual for Project Developers Version 1 Page 14 consultation report and other relevant documents to an Operational Entity (OE) for CDM and an Independent Entity for JI (IE). Step 6: The OE/IE makes the PDD publicly available through the Secretariat. Make available for 30 days (a) See Chapter 8 Step 7: OE/IE carries out validation 9 of the PDD, host country approval letter and other supporting documents and submits it to the Executive Board (for CDM projects) or Supervisory Committee (for JI projects). 2 5 weeks See Chapter 8 Step 8: In a case where a request for review is demanded, the Executive Board (for CDM projects) or the Supervisory Committee (for JI projects) will review the decision of the OE/IE. For CDM, the decision will be provided no later than at the second meeting of the EB following the request for review. See Chapter 8/9 For JI, a decision will be provided no later than 6 months after the request for review or at the second meeting of the SC Step 9: Registration with the Executive Board and determination by the Supervisory Committee Without a review for CDM it will take up to 8 weeks. For JI, up to 45 days (a) after PDD made public. Chapter 9 9 For JI projects the process of validation is referred to as determination.

25 Manual for Project Developers Version 1 Page 15 Time Further guidance see Section Table 2: Steps in the project operation phase Steps project operation phase, i.e. when a project becomes operational Step 1: Monitoring project activities by project developer 5 10 days per annum See Chapter 10 Step 2: Submission of the report with monitoring results to OE/IE 1 5 days Step 3: Verification by OE/IE of monitoring results. For CDM the OE will then certify in writing the amount of verified CERs in a certification report. The verification report for JI and the certification report for CDM have to be made publicly available. Step 4: In case there has been a request for review of the JI verification report or of the CDM certification report: (a) The EB/SC decides whether request has merit and whether to proceed with the review; (b) If it has been decided the request for review has merit, the SC will review the decision of the OE/IE. Step 5: In case there is no request for review, the verification of ERUs from JI projects and the issuance of CERs from CDM projects shall be deemed final. 2-3 weeks See Chapter 10 a) For CDM at next meeting of the EB. For JI at the next meeting of the SC or 30 days (a) after the formal request. b) 30 days (a) For JI 15 days (a) after the date of which the verification report has been made public and for CDM 15 days (a) after the date of receipt of request for issuance.. See Chapter 10 See Chapter 10 (a) The amount of days has been taken from the Marrakech Accords. It should be noted that is unclear and still undecided by the COP whether this refers to working days or calendar days.

26 Manual for Project Developers Version 1 Page Project cycle small-scale projects under the CDM The project cycle presented in Figure 1 and 2 above will be used for all different types of GHG mitigation projects. However, one exception will be made for small-scale projects under the CDM. 10 The Marrakech Accords have defined small-scale project activities for CDM as projects that are 11 : Renewable energy project activities with a maximum output capacity equivalent of up to 15 MW; Energy efficiency improvement project activities which reduce energy consumption by up to the equivalent of 15 GWh per year; Other project activities that both reduce anthropogenic emissions by sources and directly emit less than 15 kt CO 2 equivalent per year. For these small-scale project categories the Executive Board will develop more simplified and streamlined procedures. The objective of developing modalities and procedures specifically for small-scale CDM projects is to allow these projects to go through a simpler procedure, thereby reducing their transaction costs. Until specific procedures and modalities for small-scale CDM projects have been adopted the rules and the project cycle for regular CDM projects as further presented in the manual are equally applicable for small-scale CDM projects. It is expected that these modalities will be decided upon at COP-8 in November Legal contracts Although not a part of the JI and CDM project cycle as such, an important issue when developing emission reductions as a result of a JI/CDM project is the issue of ownership of the reductions generated. Sole ownership of the credits from a JI/CDM project is important to ensure that reductions are not double counted, and if they are, legal ownership can be claimed. It is important to ascertain at an early stage of the project development who has the legal ownership of the credits. It is advised to arrange and establish the claims on credits in legal contracts between the project participants involved in the development of the JI/CDM project (see also the issue of credit sharing in section 3.2 below). 10 The modalities and procedures to be developed for small-scale projects are only relevant for CDM projects and not (yet) applicable for JI projects. 11 CP.7 Decision 17 paragraph 6 under c. 12 More information can be found at

27 Manual for Project Developers Version 1 Page COSTS AND REVENUES OF JI/CDM PROJECTS In order to make an assessment on whether it is financially attractive to develop the project as a JI/CDM project, the sections below provide some information on the costs and revenues associated with developing a JI/CDM project and transacting ERUs or CERs. 3.1 Cost to develop a JI and CDM project For a project developer it is important to have an indication of what are the additional costs of developing a project as JI and CDM. These costs are referred to as transaction costs. Table 3 below indicates the approximate costs for the additional activities that have to be undertaken to develop a project as a JI/CDM project. Some of these costs are upfront costs, but other costs can be deferred until the project is operational and generating revenue, such as the verification costs. The estimates made are amongst others based on experiences from the PCF and Dutch carboncredits.nl programme and a paper on transactions costs for JI projects (EcoSecurities, Bosi, 2001) See for more info and Terms of Reference Dutch ERUPT and CERUPT programme 2001 or

28 Manual for Project Developers Version 1 Page 18 Table 3: Estimated Additional Costs Associated with JI /CDM Projects. Conventional project activities Additional JI/CDM activities Estimated additional costs for JI and CDM (in EUR) Project/business concept Additionality assessment 20,000-50,000 and feasibility activities including baseline study, calculation of emission reductions. Information for Project Idea Note and Project Design Document Project planning and basic Monitoring plan 5,000-40, design activities Project approval activities Validation by independent or operational entity Host country JI/CDM approval 5,000-25, Detailed design, procurement and final contracting activities Total Marketing of credits Construction / implementation of Project Production/operation, sales, Additional monitoring maintenance, administration Verification Transfer of Carbon Credits Pay international administration levy i.e. Registration with JI Supervisory Committee or CDM Executive Board Internal costs or if external brokers are used payment is likely to be due when payments are received from buyer of credits see below Total development costs 30, ,000 Unknown 3,000-15,000 per time If brokers are utilised success fee in region of 3-15% of Emission Reduction value. CDM: Percentage of CERs. Exact percentage is undecided. JI: No specified charge as yet but likely to make some sort of charge. Adaptation fee Only applies to CDM projects 2% of CERs from CDM projects 14 Depending on complexity of the project and sources of GHG emissions. 15 Depending on complexity, location of the project etc.

29 Manual for Project Developers Version 1 Page 19 A project developer will have to weigh up the transaction costs against the revenues that can be expected from the sale of emission reductions. The prices that the public carbon-purchasing programmes are currently prepared to pay vary between 3 and 9 EUR per ton of CO 2. It is should be noted that the market for carbon trading is still emerging and that prices paid for carbon are likely to change in the future. The revenue secured in a Carbon Purchase Agreement will be a function of the number of credits generated per annum, the price that can be obtained per credit, and the total number of validated years over which the credits can be generated (i.e. the crediting period). If the transaction costs are high when compared to the revenue stream then the project sponsor is unlikely to proceed in developing the project as a CDM/JI project. In general the transaction costs are not likely to differ substantially whether the project is 1 MW or 100 MW, so the larger the project the more likely it is that the revenue stream will be large enough to warrant developing the project as a JI/CDM project. However, as mentioned the CDM Executive Board is considering how to reduce the requirements for small scale projects so as to make them more feasible to develop as JI/CDM projects. The carbon revenues compared to the total project costs will vary per project. Factors that have an impact on the carbon revenues include type of project, project location, project related negotiations, etc. Another important factor is the type of GHG reduced. For example, the global warming potential of methane is 21 times higher than the global warming potential for CO 2. Therefore, the proportion of carbon revenues compared to total project costs is likely to be higher for projects reducing methane emissions (landfill and waste recovery) than for projects in the power sector. It should be noted that this information is just indicative and that all these factors have to be assessed per specific project. 3.2 Credit ownership and credit sharing During the project design phase the project proponent should contractually agree with the major project participants on the ownership structure of any emission reduction credits that would result from the project. The project developer should establish the ownership structure with the project partners and the host government. The project partners that may claim the emissions reductions could include, amongst others, the developer, financiers, and technology provider. Credit sharing is the concept in which a host country would like to keep a certain percentage of the credits or credit revenue. The host country is likely to be interested in credits when one or more of the following applies: (Dixon et al, 1999): - It is subject to an emissions reduction target (as in the case of JI); - It does not have an emission reduction target now but wants to bank credits for future commitments; - Credits can be traded on a market. Individual negotiations will determine how the credits will be shared.