Introduction to Baseline Setting: Why, What and How? Mr. Derik Broekhoff Technical Workshop 3 May 27, 2012
The Role of Baselines in GHG Markets BAU BAU Cap Baseline Emission Trading System Crediting Mechanism
The Role of Baselines in GHG Markets (continued) BAU Cap credits BAU Baseline Emission Trading System Policy Question: Is cap consistent with broader GHG mitigation goals? Crediting Mechanism Policy Question: Is baseline consistent with ensuring environmental integrity?
Key Baseline Policy Questions 1. Who are the market actors and what is the baseline scale? 2. Will the baseline be absolute or intensity-based? 3. What is the level of ambition?
Market Actors Market Actors entities that undertake GHG mitigation in exchange for credits. These may include: Project-based: individual facilities, projects (e.g., CDM) Scaled Up: institutional actors (e.g., governments, industry associations, aggregators) Both together Scale of baseline will be determined by scale of market actor
Possible Market Actors & Associated Baselines Market Actors Baseline required for Project-Based Crediting Mechanism Individual projects only Each participating project Individual projects only Each participating project Scaled-Up Crediting Mechanisms Institutional actor only Collective group of sources only Both individual projects and institutional actors Each participating project Examples Conventional CDM projects Some CDM PoAs Collective group of sources Credit driven mechanisms (see NERA 2011) Policy driven mechanisms (see NERA 2011) Collective group of sources Nested project mechanism
Baseline Development Frequently bottom up for project-based mechanisms (projects propose individual baselines) Generally top down for scaled-up mechanisms (e.g., standardized baselines for projects; collective baseline for groups of sources) Requirement for consistency between project & collective baselines may be achieved by: Apportioning collective baseline to each project/facility Summing all project/facility baselines to determine collective baseline
Absolute vs Intensity Absolute baseline expressed as total GHG emissions (fixed ex ante) Intensity baseline expressed as emissions rate (e.g., t CO 2 / MWh) Absolute may be more ambitious, but: May be seen as barrier to economic growth May result in leakage of emissions
Level of Ambition Baselines will often be set below BAU in order to: Conservatively account for uncertainty in BAU emissions estimates Ensure that crediting mechanisms result in positive net GHG reductions globally Ambition needs to balanced against the need to provide adequate incentives for market actors, which will be a function of: Price of credits The number of credits they can receive
Key Baseline Technical Steps 1. Identify reference technologies, practices, or conditions 2. Determine a valid time period 3. Decide on static vs. dynamic elements 4. Choose an approach for determining baseline emissions
Baseline Components: Activity Data & Emission Factors Activity Data level of activity associated with a process that generates GHG emissions (e.g., MWh of electricity generation) Emission Factors rate of emissions from technologies or practices involved in that process (e.g., tons of CO 2 / MWh)
Identifying Baseline Alternatives Reference Technologies, Practices, Conditions possible alternatives to GHG mitigation activities These alternatives will be determined by: Coverage and scope of the crediting mechanism Geographic area where the mitigation activities occur Temporal trends in technologies, practices, or conditions
Coverage and Scope Coverage and scope of the crediting mechanism will determine what may qualify as GHG mitigation activities & therefore the set of baseline alternatives Coverage and Scope of Crediting Mechanism Reference technologies All grid-connected electricity production and consumption (1) Electricity end-use technologies; (2) Electricity generation technologies & fuels Existing and new gridconnected electricity generation Current and projected electricity generation technologies (power plants) and fuels Peaking cycle natural-gas fired power plants Natural gas power plants designed to serve peak demand
Geographic Area Geographic area will determine the relevant alternatives May be defined by: Common social or cultural characteristics Common economic circumstances Common legal frameworks Physical infrastructure constraints Biophysical, climatic, or ecological conditions
Temporal Trends Temporal trends will determine the vintages of technologies or practices to consider May depend on: Whether crediting mechanism targets new or old facilities Whether technologies or practices are changing rapidly Level of ambition for the baseline
Length of the Baseline Period May depend on: Typical investment & planning horizons Expected duration of the crediting mechanism How rapidly and predictably conditions are changing (and whether baseline estimates are static or dynamic) The conservativeness of baseline emissions estimates (level of ambition) How frequently data can be obtained for updating
Static vs. Dynamic Variables Static Variables determined using ex ante assumptions Dynamic Variables determined using ex post measurement Both activity data and emission factors may be static or dynamic Intensity baselines rely on dynamic variables for activity data (e.g., industrial production)
Static vs. Dynamic Variables (continued) Dynamic variables will make sense when: Conditions change rapidly in ways that are hard to predict The variables are presumed to be unaffected by targeted GHG mitigation activities (so their values in the baseline are identical to measured values) Doing so will not adversely affect investment certainty for market actors
Approaches to Determining Baseline Emissions Activity Data Use Actual Data (Intensity Baselines) Pros: Requires no additional modeling/analysis Cons: May not always be appropriate; data must be easily acquired Extrapolate from historical data Pros: Relatively easy where data are available Cons: Historical data not always a good predictor of future Financial, economic, engineering, or behavioral modeling Pros: May provide more accurate predictions Cons: Costly & time-consuming; accuracy not guaranteed
Approaches to Determining Baseline Emissions (continued) Emission Factors Assume continuation of current technologies/practices Pros: Relatively easy to do Cons: Not applicable if existing conditions are changing Identify discrete baseline alternatives Pros: Accurate for identifying BAU (in theory) Cons: Costly and time-consuming Establish performance standards or benchmarks Pros: Streamlined way to estimate emission factors for multiple sources/installations Cons: Requires upfront time & effort to develop; may be costly to update
Building in Ambition Activity Data: Discount historical or modeled projections (e.g., X% below BAU projection) Use conservative modeling assumptions Emission Factors: For existing facilities, assume conservative baseline alternatives rather than continuation of current conditions Use conservative assumptions to evaluate discrete alternatives Set an aggressive performance standard or benchmark (one that exceeds BAU expectations)