Page 1
Gas Flaring Reduction
Projects
Framework for Clean Development
Mechanism (CDM) Baseline Methodologies
THE WORLD BANK
30949
Page 2
�
2004 The International Bank for Reconstruction and Development / The World
Bank
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Washington, DC 20433
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All rights reserved.
First printing September 2004
The findings, interpretations, and conclusions expressed herein are
those of the authors and do not necessarily reflect the views of the
GGFR Partners, or the Board of Executive Directors of the World
Bank and the governments they represent.
The World Bank does not guarantee the accuracy of the data
included in this publication and accepts no responsibility
whatsoever for any consequence of their use.
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iii
Acknowledgments
This report is one of the outputs of the Global Initiative on Gas Flaring Reduction,
led by the World Bank Group in collaboration with the Government of Norway.
The Initiative was transformed into the Global Gas Flaring Reduction Public
Private Partnership (GGFR) at the World Summit on Sustainable Development
held in Johannesburg in August 2002. The GGFR aims to support national
governments and the petroleum industry in their efforts to reduce flaring and
venting of gas associated with the extraction of crude oil.
In addition to the World Bank this Partnership currently comprises the
governments of Algeria, Angola, Equatorial Guinea, Ecuador, Indonesia, Nigeria,
the region of Khanty Mansiysk in Russia, Canada, Norway, and the United States
of America. The following oil companies, BP, ChevronTexaco, ENI,
ExxonMobil, Norsk Hydro, Shell, SNH, Sonatrach, Statoil, and TOTAL, as well
as OPEC are also partners.
Torleif Haugland, Paul Parks and Randall Spalding-Fecher of ECON Analysis
were the principal authors of this report. The development of the report was led
by Calliope Webber from the GGFR core team in the Bank together with
significant collaboration with Johannes Heister and Lasse Ringius from the
Methodology and Quality Assurance t
eam of the Bank�s Carbon Finance
Business. Highly valuable input and support was provided by other ECON
personnel, specialized consultants, the GGFR core team, World Bank Group staff,
and GGFR partners. Several GGFR workshops and CDM conferences provided
the basis for extensive discussions and valuable input to the development of the
report. Esther Petrilli, World Bank Oil and Gas Policy Division, was responsible
for editing and formatting the document.
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v
Contents
Acknowledgments......................................................................................iii
Abbreviations and Acronyms ....................................................................ix
Units of Measure..........................................................................................x
Executive Summary.....................................................................................1
1
Introduction......................................................................................7
1.1
The CDM and Gas Flaring Reduction.....................................7
1.2
The CDM and Baseline Methodologies...................................7
1.3
Preparing a New Baseline Methodology.................................8
2
Structure and Scope of a Methodology........................................11
2.1 Key
Concepts.......................................................................11
2.1.1
Baseline Approaches, Methodologies,
and Scenarios...........................................................11
2.1.2
Project Boundaries and Leakage ..............................12
2.1.3 Additionality...............................................................13
2.2 Approaches ..........................................................................13
2.2.1
Three Approaches in the Marrakech Accords............13
2.2.2
Suitable Approaches for GFR projects......................14
2.2.3
Projects Already under Way......................................15
2.3 Guiding
Principles.................................................................15
2.4
Scope and Number of Methodologies...................................17
2.4.1
Emissions Sources from the Gas Value Chain..........17
2.4.2
Options for Developing AG and Impact on the
Gas Value Chain.......................................................19
2.4.3
A Modular Approach to Baseline Methodology..........20
2.4.4 New
Upstream
Elements...........................................20
2.4.5 Downstream
Modules ...............................................21
3
Additionality ...................................................................................23
3.1 Additionality
in
Baseline
Methodologies................................23
3.2 Tools
for
Demonstrating
Project
Additionality........................23
3.2.1
Framework for Use of the Tools................................24
3.2.2 Regulatory
Requirements..........................................25
3.2.3
Economic and Financial Assessment........................26
3.2.4 Barrier
Analysis.........................................................27
3.2.5 Common
Practice......................................................27
3.2.6
Using Multiple Additionality Tools..............................28
3.3 Considering
Country
Policies................................................28
3.4
Regarding a Voluntary Standard...........................................29
4
Project Boundary and Leakage.....................................................31
4.1
How to Determine the Project Boundary...............................31
4.1.1 Principles ..................................................................31
4.1.2 Project
Types............................................................31
4.1.3 Multicountry
Projects.................................................33
4.2
How to Determine Leakage ..................................................33
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vi
5
Data and Monitoring.......................................................................35
5.1 Key
Parameters....................................................................35
5.2
Data Sources and Availability ...............................................35
5.3 Uncertainties.........................................................................36
5.4 Transparency
and
Conservatism..........................................36
5.5 Monitoring
Processes...........................................................37
Annex 1
CDM Primer.........................................................................39
A.1.1
The CDM after Marrakech ....................................................39
A.1.2
The CDM Project Cycle ........................................................39
Annex 2
Baseline Methodology Approval Process.........................43
Annex 3
GFR and the CDM...............................................................47
A.3.1
Key Features of GFR Projects..............................................47
A.3.2
The Gas Value Chain ...........................................................47
A.3.3
GHG Emissions along the Gas Value Chain.........................49
Annex 4
Methodology Modules........................................................53
A.4.1
Power Sector Module ...........................................................53
A.4.1.1 Introduction..............................................................53
A.4.1.2 Background to the Methodology...............................53
A.4.1.3 Step 1: Proving Additionality.....................................54
A.4.1.4 Step 2: Defining the Baseline Scenario and
Calculating the Baseline Emission Rate....................54
A.4.1.5 Key Issues ...............................................................55
A.4.2
Fuel Switching Module.........................................................56
A.4.2.1 Introduction..............................................................56
A.4.2.2 Proving Additionality.................................................56
A.4.2.3 Defining the Baseline Scenario and Calculating the
Baseline Emission Rate ............................................56
Annex 5
Rang Dong Case Study......................................................59
A.5.1
Applicability of the Rang Dong Case.....................................59
A.5.2 Project
Background ..............................................................60
A.5.3 Methodology.........................................................................60
A.5.3.1 Section 1. Title of Proposed Methodology................60
A.5.3.2 Section 2. Description of the Methodology ...............60
A.5.3.3 Section 3. Key Parameters and Assumptions...........61
A.5.3.4 Section 4. Project Boundary.....................................62
A.5.3.5 Section 5. Assessment of Uncertainties ...................62
A.5.3.6 Section 6. Calculation of Baselines Emissions and
Determination of Project Additionality........................63
A.5.3.7 Section 7. Leakage ..................................................63
A.5.3.8 Section 8. Criteria Used in Development of the Baseline,
including Conservatism and Transparency................64
A.5.3.9 Section 9. Assessment of Strengths and
Weaknesses .............................................................64
A.5.3.10
Section 10. Other Considerations........................64
Annex 6
Review of Methodologies Submitted as of April 1, 2004..65
Annex 7
Glossary of CDM Terms.....................................................71
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Annex 8
Proposed New Methodology (CDM-NMB).........................79
Baseline...........................................................................................79
Monitoring (CDM-NMM) ...................................................................83
List of Figures
Figure 2.1
Relationship Among Baseline Approach, Methodology, and
Scenario
..................................................................................12
Figure 2.2
Emissions Sources along the Gas Chain..............................19
Figure 2.3
Examples of Emissions Impacts along the Gas Chain ..........20
Figure 3.1
Tools to Test Additionality.....................................................25
Figure A.1.1
Steps in the CDM Project Cycle............................................41
Figure A.2.1
Steps in the Process of Methodology Approval....................44
Figure A.3.1
Overview of Upstream and Midstream Gas Industry............49
Figure A.5.1
Description of Rang Dong Project and Project Boundary.....62
List of Tables
Table A.3.1
Summary of Emissions Sources and Emissions Reductions
Opportunities at Each Stage of the Gas Chain......................51
Table A.4.1
Proving Addtionality..............................................................54
Table A.6.1.
Review of Executive Board (EB) Methodology Approaches
as of March 2004..................................................................65
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ix
Abbreviations and Acronyms
AG Associated
gas
AIJ
Activities implemented jointly
API American
Petroleum
Institute
CAPEX Capital
Expenditures
CDM
Clean development mechanism
CER
Certified emission reduction
CERUPT
Certified Emission Reduction Unit Procurement
Tender
CH
4
Methane
CHP
Combined heat and power systems
CO
2
Carbon dioxide
CO
2e
Carbon dioxide equivalents
COP
Conference of the Parties
DNA
Designated national authority
DOE
Designated operational entity
EB
CDM Executive Board
EE Energy
efficiency
ERUPT
Emission Reduction Unit Procurement Tender
EU European
Union
GFR
Gas flaring reduction
GGFR
Global Gas Flaring Reduction Public-Private
Partnership
GHG Greenhouse
gas(es)
GTL Gas-to-liquids
GWh Gigawatt
hours
H
2
S
Hydrogen sulfide
HFC Hydrofluorcarbons
IEA
International Energy Agency
IPCC
Intergovernmental Panel on Climate Change
IPIECA
International Petroleum Industry Environment
Conservation Association
IRR
Internal rate of return
JVPC
Japan Vietnam Petroleum Company
LFG Landfill
gas
LNG
Liquefied natural gas
LPG Liquefied
petroleum
gas
LRMC
Long run marginal cost
Meth. Panel
Baseline and Monitoring Methodology Panel
MOP
Meeting of the Parties
N
2
0
Nitrous oxide
NCDF
Netherlands Carbon Development Fund
NGL Natural
Gas
Liquids
NM New
methodology
NMB
New methodology baseline
Page 10
x
NMM
New methodology monitoring
NPV
Net present value
OECD
Organization for Economic Cooperation and
Development
OGP
International Organization of Oil and Gas Producers
OPEX Operational
Expenditures
PCF Prototype
Carbon
Fund
PDD
Project Design Document
PDD-NBM
PDD new baseline methodologies
PSA Production
sharing
agreement
QA Quality
assurance
QC Quality
control
RE Renewable
energy
UNFCCC
United Nations Framework Convention on Climate
Change
WBCSD
World Business Council for Sustainable
Development
WRI World
Resources
Institute
Units of Measure
GJ Gigajoule
GWh Gigawatt
hour
KG Kilogram
KM Kilometer
kWh Kilowatt
hour
M
3
Cubic meters
MCM
Million cubic meters
MW Megawatt
tCO
2
Tons of carbon dioxide
Page 11
1
Executive Summary
Abstract
Flaring of associated gas contributes significantly to the global emissions of
greenhouse gases; flaring emissions are currently estimated to be 300 million
tons of carbon dioxide equivalents (CO
2e
)
per year. The clean development
mechanism (CDM) can help stimulate investments in projects that reduce flaring
and venting of associated gas. Pilot projects will be instrumental in defining and
furthering the role of CDM in gas flaring reductions.
Rules and procedures are being established to determine under what conditions
such investments can earn CDM carbon credits. According to the Marrakech
Accords, a CDM project activity is additional if its emissions are below those of
its baseline. The baseline for a CDM project activity is the scenario that
reasonably represents the anthropogenic emissions by the sources of greenhouse
gases that would occur in the absence of the proposed project activity. The
business-as-usual case, in the absence of the project, typically is continued
flaring. To achieve CDM designation, a project developer must use a
methodology approved by the CDM Executive Board for baseline determination.
To date, only one baseline methodology for flaring reduction projects has been
approved, and the overall applicability of this methodology has still to be
determined. Several more methodologies need to be developed and approved to
cover the range of project options in this sector. Drawing on recent decisions by
the CDM Executive Board and recommendations from the Methodology Panel,
this report presents a framework for constructing such methodologies and
outlines the tools that can be used to demonstrate additionality.
This report presents developments and discussions that were held up to June 25,
2004 and the CDM Proposed New Methodology: Baseline (CDM-NMB), Version
01 (in effect as of July 1, 2004).
1
Background
For more than a decade, flaring and venting of associated gas (AG) has remained
stable at a level representing global emissions of greenhouse gases (GHG) of
about 300 million tons CO
2e
per year. The Global Gas Flaring Reduction Public
Private Partnership (GGFR)
2
was established to supplement and strengthen efforts
made by governments and companies to reduce and eventually eliminate flaring.
The GGFR considers the CDM an important means to achieve flaring reductions
and also sees such projects to be central to the objectives of the Kyoto Protocol.
Promoting the CDM to accelerate flaring reduction investments is therefore an
important part of GGFR�s work program, of which this report is one output. The
report identifies and explains salient factors in developing baseline methodologies
for gas flaring reduction projects, and provides a framework that serves as a guide
for project developers to use for developing baseline methodologies.
1
Annexes 7 and 8 comprise edited highlights of the guidelines and forms derived from the UNFCC website
at:
http://cdm.unfccc.int/Reference/Documents/cdm_nmb/English/CDM_NMB.pdf
.
These are included for
reference purposes only. Please refer to UNFCC website for complete guidance documents
.
2
See www.worldbank.org/ggfr
Page 12
2
A
baseline methodology
is used to select a baseline scenario, calculate baseline
emissions, and determine project additionality for a particular project type or
within a particular sector. The CDM rules require that any CDM project
developer identify and use a baseline methodology approved by the CDM
Executive Board (EB). If an applicable methodology does not exist, the project
developer must develop a new baseline methodology to be put forward for
approval to the EB.
Currently, only one baseline methodology for gas flaring reduction (GFR)
projects is approved by the EB: the Rang Dong project in Vietnam (summarized
in Annex 5). Although elements of this methodology are relevant and useful for
other projects, this report concludes that few project developers will be able to
apply this methodology directly. This means that more baseline methodologies for
GFR projects will have to be developed and approved for the CDM to have a
major impact on this sector.
Although the specific aim of this study is to contribute to the development of flare
reduction baseline methodologies, the broad objective is to assist GGFR partners
in applying the CDM as a financial incentive to use AG. A sectoral approach will
align efforts, decrease CDM transaction costs, and enhance investment in flare
reduction while adhering to the overall objectives of the CDM.
This report does not develop methodologies for specific project categories. This is
not possible because the EB requires that a baseline methodology be submitted on
a
project rather than class, or sector, basis (the so-
called �bottom-up approach�).
Rather, this report provides a framework and guidance for constructing baseline
methodologies for flaring reduction projects. The report supplements other
guidebooks relevant for petroleum sector project developers.
3
Key Elements
The baseline methodology is the starting point when developing a CDM project
proposal. A baseline methodology must set out a logical framework that clearly
addresses three issues:
�
Selection of a baseline scenario
�
Determination of whether the project would be in the baseline, that is,
whether the project is part of the most likely course of
development
�
Assurance that the implementation of the project would result in a lower
emission of GHG than the baseline
The project is considered additional only if it is not in the baseline and has lower
emissions of GHGs than that of the baseline. Hence, these two points represent
the principle of CDM additionality. A methodology will be judged by the logic
and transparency of its design and how well it addresses these three issues.
3
For example
Petroleum Industry Guidelines for Reporting Greenhouse Gas Emissions
,
developed by
International Petroleum Industry Environment Conservation Association (IPIECA), Oil and Gas Producers
(OGP), and American Petroleum Institute
(API);
Compendium of Greenhouse Gas Emissions Methodologies
for the Oil and Gas Industry
developed by API; and
The Greenhouse Gas Protocol: Project Quantification
Standard
developed by World Resources Institute (WRI) and World Business Council for Sustainable
Development (WBCSD).
Page 13
3
Design Considerations
The analysis of decisions and reviews of the baseline methodologies submitted
thus far to the Methodology Panel identified several key lessons and principles
that should guide project developers in proposing new baseline methodologies.
These general guidelines are as follows:
�
Simplicity:
Use straightforward, transparent elements that are clearly
applicable to the creation of a baseline.
�
Project basis:
The scope and its applicability should not be too general,
and it should be linked closely to the submitted project.
�
Precedence:
Elements of approved methodologies (for example, power
generation, energy efficiency, industrial fuel switching) should be
incorporated as appropriate to demonstrate its consistency with
established methodologies.
�
Conservatism:
If more than one element (or algorithm, factor, or
assumption) is appropriate, then the one that is most accurate and
generates the least emission credits should be used.
Given that all GFR projects have common elements and can impact on one or
more of the three sectors in the gas value chain (that is, production, transport and
processing, downstream use), developing algorithms for each of these sectors will
simplify the process of baseline development and project validation.
4
A
project
developer who proposes a new methodology could then draw on previously
developed elements in designing a methodology for a new project type. For the
upstream module, the baseline emissions are based on the amount of gas that
would be flared and vented without the project. The issue of processing facilities
will depend on the project but could be a separate module of the methodology, at
least for liquefaction processes (liquefied natural gas [LNG] and gas-to-liquids
[GTL]). Downstream components would be added to the core upstream
component. A number of modules can be developed that addresses downstream
components of projects, particularly in the power sector and industrial fuel
switching, where approved methodologies are available that could be easily
adapted to flaring reduction projects. Given the bottom-up process adapted by the
EB, the probable course of development is that several additional methodologies
will be approved, which in the future could be combined to one or more standard
methodologies.
Additionality
The EB recommends four tools to test for project additionality. The purpose is to
guide a more rigorous approach in selecting baseline scenarios and demonstrating
project additionality. Regarding baseline methodology for flaring reductions
projects, certain project additionality points should be noted:
�
Regulatory requirements:
Flaring may be prohibited by law and, hence,
not be a baseline activity; however, a legal prohibition can be
ambiguous. Even where regulation de jure prohibits flaring, in
4
For example, the Rang Dong approved methodology contains specific algorithiums for calculating carbon
dioxide (CO
2
)
emissions and emission reductions that can be used when developing new methodologies.
Page 14
4
many instances flaring still occurs either because of
nonenforcement, exceptions to the regulation, or the low cost of
noncompliance. The methodology must be broad enough to cover
such eventualities and allow them to be tested for additionality on
a
case-by-case basis.
�
Qualitative or quantitative assessment:
This tool may be applied to
determine whether the potential CDM project would not be viable
based on a normal business analysis
5
of
the project developer.
Economic and financial assessments will not necessarily determine
project additionality and often other factors, such as a barrier
analysis, should be used to establish project additionality.
�
Barriers analysis:
This refers to factors generally outside the direct
control of the project proponent that affect the project�s likelihood
of implementation. Barrier analysis can be a critical factor in
justifying many CDM AG investments, but, by nature, they are
specific to the area, regime, or type of project. Thus, a
methodology will need to identify and provide a general means to
analyze and measure the impact of such barriers in determining
project additionality.
�
Common practice:
Common practice can be used if the developer can
demonstrate that the project type is not in general use in the
proposed area of implementation. Applying this tool requires
documentation that such a practice exists; and, in addition to the
project, reference should be made to other companies developer
that employ such practices.
These tools are not meant to be exclusive but rather represent four ways to
address and justify additionality within a proposed methodology. The tools are
designed to be used in concert, however, in actual projects, use of one of the tools
could be so definite that the other tools are less relevant. Generally, the
additionality argument is strengthened through a combination of tools such as
market and/or regulatory barriers, qualitative or quantitative assessment
(economic and financial assessment), and common (prevailing) practice.
Economic and financial analysis often has been discussed as the primary criteria
for demonstrating additionality, and it has been prominent in many of the
methodologies approved to date.
6
It is important to note that in these cases, the
primary use of this analysis has been to rank different project options that is,
comparing the financial attractiveness of different baseline options. As
methodologies for different types of gas flaring projects are developed, they could
include a range of financial indicators, although it is also possible, that in some
cases, financial indicators will not be appropriate for determining project
additionality.
5
Business as usual, in this case, means that the project would not be implemented under the normal course of
events.
6
In the approved Rang Dong methodology, the internal rate of return is used.
Page 15
5
Hence, in proposing the use of a particular type of project additionality tool, its
applicability and its ability to provide clear and transparent indicators should be
considered and be balanced with an analysis of other barriers to the project.
Project Boundary and Leakage
Defining the project boundary, that is, determining which emissions are
attributable to the project and assessing the potential leakage is important and
requires clear definition. The project boundary should cover all emissions sources
that are under the control of project participants, significant, and attributable to
the project. All emissions from extraction, capture, and processing should be
included in the project boundary, including any fugitive and combustion
emissions at the production and processing sites. Fugitive and combustion
emissions from transport and distribution infrastructure that is part of the project
investment would also be included.
Downstream emissions from end-use sites can be included in the project boundary
if the project owner has investment in these activities, is contractually able to
monitor the direct impacts of the project and claim certified emission reductions
(CERs), and can identify the dedicated end use of the gas downstream.
Leakage is defined as emissions outside of the project boundary that are
measurable and attributable to the project. The major issue for gas flaring is if
downstream emissions from the gas captured and transported have significant
enough impacts so as to reduce the benefits of the emissions reduced upstream.
The Global Gas Venting and Flaring Reduction Voluntary Standard
In May 2004, the GGFR Partnership announced a Voluntary Global Standard for
Gas Venting and Flaring Reduction. The Standard outlines a plan of action,
including implementation of the Standard by partner companies and countries.
The Voluntary Standard should not influence the baseline for flare reduction
activities. The Standard is a process not a fixed target and should be seen as an
aspiration to achieve reduction and, eventually, elimination of flaring. The
approach set forth in the Standard is intended to support other flare reduction
initiatives and go beyond prevailing flaring and venting practices, which would
otherwise occur in many countries. One way to achieve the aspiration of the
Standard is to use the CDM. When relevant, project proponents can reference the
Standard in the baseline methodology and clarify how it relates to the
additionality assessment.
Next Steps
This report has clarified concepts and outlined a framework to help project
developers create transparent, consistent, and justifiable baseline methodologies,
so that gas flare reduction projects can qualify for CDM status. From a GGFR
perspective, it is vital that methodologies be developed and submitted to the
Board that the GGFR partners believe are appropriate to their needs and are
broadly applicable to gas flaring projects. Only in this way can the GGFR partners
ensure that their concerns and viewpoints in this area are taken into account and
are incorporated into CDM baseline methodologies.
Page 16
6
Once a body of GFR baseline methodologies has been developed and approved, a
process will likely be undertaken to consolidate the methodologies. The EB has
already begun to consolidate methodologies in some sectors. Further initiatives by
the GGFR, based on, among others, the findings of this report, can help in the
process of establishing a set of robust and inclusive methodologies that are
appropriate for the needs of energy companies and broadly applicable to GFR
projects.
This report concludes that several new gas flaring methodologies will be required
to encompass the full range of gas flaring CDM projects. Judging from recent EB
actions, these approved methodologies will then be consolidated and rationalized
to create a set of specific and robust methodologies for developing baseline
methodologies for the majority of such projects. Such a result will lower the cost
of developing Project Design Documents (PDDs) and assist developers by
reducing uncertainty over what qualifies as a CDM project.
Page 17
7
Introduction
This section presents the context of the report, the relevance of the clean
development mechanism (CDM) for gas flaring reduction (GFR) projects, and an
introduction to CDM baseline methodologies.
�
The CDM and Gas Flaring Reduction
Flaring and venting of associated gas (AG) contribute significantly to the global
emissions of greenhouse gases (GHGs). Specifically, these activities are currently
estimated to result in about 300 million metric tons of carbon dioxide equivalents
(CO
2e
)
per annum. This level may increase as oil production increases in countries
and regions that currently flare a large share of their AG. The Global Gas Flaring
Reduction Public Private Partnership (GGFR) works to supplement and
strengthen efforts made by governments and companies to reduce and eventually
eliminate flaring of AG. The CDM can be a valuable tool in achieving this goal
by accelerating investments in flare reductions.
The GGFR Report No. 2,
Kyoto Mechanisms for Flaring Reductions
,
7
explored
how and under what circumstances GFR investments can earn carbon credits. The
report concluded that GFR projects can offer results that are central to the
objectives of the Kyoto Protocol and the CDM because often they do the
following:
�
Offer large, real, measurable, and long-term emission reductions;
�
Have relatively moderate transaction costs;
�
Are central to the host country policies in terms of resource
management, environment, and fiscal benefits;
�
Can serve to support other development and sustainability goals on both
a
national and local basis; and
�
Can mobilize substantial technological, financial, and political resources
from international energy companies.
These results formed the basis for several new activities in th
e
GGFR�s work
program to promote the use of Kyoto Mechanisms and to accelerate flaring
reduction investments.
Guidelines and recommendations for establishing CDM baseline methodologies,
presented here, represent one of these efforts. Although the specific aim of this
study is to contribute to the development of flare reduction baseline
methodologies, the broad objective is to assist GGFR partners in using the CDM.
The goal is to decrease CDM transaction costs and enhance investment in flare
reduction while assuring environmental integrity and the overall objectives of the
CDM.
�
The CDM and Baseline Methodologies
The CDM rules
8
require any CDM project developer to use a baseline
methodology
9
approved by the CDM Executive Board (EB). If an applicable
7
See
http://www.worldbank.org/ogmc/ggfr
report published 2003
8
For simplicity and clarity, i
n
this report the term �CDM rules� will encompass the CDM modalities and
procedures.
Page 18
8
methodology does not exist, the project developer must develop a new baseline
methodology to be put forward for approval to the EB.
At the time of writing, only one baseline methodology for GFR had been
approved by the EB: the Rang Dong project
10
(see Annex 5). Given the current
trend of baseline methodologies being relatively narrow in scope and
applicability, many more baseline methodologies for GFR projects will likely be
developed and presented for approval. This trend is driven by the fact that the
Executive Board requires that a baseline methodology be submitted on a project
rather than class or sector basis (the so-
called �bottom-up approach�).
Because a new baseline methodology should be linked closely to the project it is
accompanying (without including project-specific information), this report does
not develop baseline methodologies for specific GFR projects, but rather it
identifies and explains salient factors and provides a framework for project
developers to develop baseline methodologies for GFR projects.
An important part of this project has been to collect input from key stakeholders
to develop guidelines and recommendations for baseline methodologies. The
following activities were undertaken:
�
Extensive analysis of proposed baseline methodologies and the reviews
and decisions of these by the EB
�
Consultation with a wide range of CDM experts and stakeholders
�
Analysis of proposed GFR activities
These activities helped clarify concepts and outline a framework for project
developers to assist them in creating consistent and valid baseline methodologies.
Over time, it is probable that a body of GFR baseline methodologies will be
developed and approved, and then a consolidation process likely will be
undertaken to reduce the number of methodologies. The EB is now taking
measures to consolidate some methodologies. This report, together with other
related initiatives,
11
can help in the process of establishing a small number of
robust and inclusive methodologies that are appropriate for the needs of energy
companies and broadly applicable to GFR projects.
�
Preparing a New Baseline Methodology
The Marrakech Accords state that the developer should �forward the proposed
methodology, together with the draft Project Design Document (PDD), including
a
description of the project and identification of the project participants, to the
9
A
baseline methodology is a means to select a baseline scenario, calculate emissions for a baseline scenario
applicable to a particular project type or particular sector, and determine project additionality.
10
The Rang Dong project is the first gas flaring
�related methodology to be submitted to the United Nations
Framework Convention on Climate Change (UNFCCC) process, as NM0026. Complete information is
provided at
http://cdm.unfccc.int/methodologies
.
11
Several organizations have undertaken work relevant for the development of baseline methodologies for
petroleum sector CDM projects, for example, the
Emission Reduction in the Natural Gas Sector through
Project-Based Mechanisms
developed by the International Energy Agency (IEA);
Petroleum Industry
Guidelines for Reporting Greenhouse Gas Emissions
developed by International Petroleum Industry
Environment Conservation Association (IPIECA), Oil and Gas Producers (OGP), and American Petroleum
Institute
(
API); and
The Greenhouse Gas Protocol: Project Quantification Standard
developed by World
Resources Institute (WRI) and World Business Council for Sustainable Development (WBCSD).
Page 19
9
executive board for review.� Such a process requires that the project be in an
advanced state of development.
Initially, guidelines and format of presenting a new baseline methodology were
presented as Annex 3 to the PDD. On July 1, 2004, the EB approved a new and
freestanding form for new baseline methodologies (PDD-NMB, refer to Annex 7
&
8, available at
http://cdm.unfccc.int
).
The CDM-NMB form has the following
sections:
�
Section A:
Identification of methodology
�
Section B:
Overall summary description
�
Section C:
Choice of and justification for the baseline approaches listed
in paragraph 48 of CDM modalities and procedures to be
considered the most appropriate
�
Section D:
Explanation of and justification for the proposed new
baseline methodology
�
Section E:
Data sources and assumptions
�
Section F:
Assessment of uncertainties (sensitivity to key factors and
assumptions)
�
Section G:
Explanation of how the baseline methodology allows for the
development of baselines in a transparent and conservative manner
Each section of this report generally follows the outline of the CDM-NMB
format, although some of the issues overlap and the final format was not available
during the drafting of this report.
Page 20
Page 21
11
Structure and Scope of a Methodology
This section describes the key concepts and guiding principles of developing a
GFR methodology. It considers the scope of methodologies and their relation to
the gas value chain, before addressing the specific approaches in the language of
the CDM rules.
2.1 Key
Concepts
This section considers the terminology and language of the Kyoto Protocol and its
supporting agreements on rules and procedures. Understanding these key concepts
is critical to the development of sound methodologies, particularly because,
within the CDM, many of the terms have specific meanings that are different from
their traditional meanings.
2.1.1
Baseline Approaches, Methodologies, and Scenarios
The terms
baseline
or
baseline scenario
are used to describe the case against
which the impacts of any emissions reductions measure or program are evaluated.
The baseline scenario for a CDM project is a hypothetical scenario of the most
likely development in the absence of the CDM. The baseline scenario is used to
calculate the amount of emission reductions the potential project activity
generates, and once verified and certified, the resulting credits become a
marketable commodity. The certified emission reduction units (CERs) are carbon
credits that can be bought, sold, banked, or used in emission trading systems.
12
Before the 2001 CDM rules, projects in the Activities Implemented Jointly
13
pilot
program developed a baseline scenario for each project. Each project developer
was responsible for developing a unique forecast based on an assessment of the
specific conditions at the site under consideration (based on national policies,
economic and energy use projections, and so on) and explaining why this was a
logical and probable outcome.
One of the major changes in 2001, with the approval of the CDM rules, was to
require projects to use an approved
baseline methodology
,
which is a protocol
for selecting the baseline scenario and calculating baseline emissions for a
particular project type or within a particular sector so as to produce a baseline
scenario. A baseline methodology contains formulae and algorithms for a
particular project type, as well as certain parameters for calculating the baseline
scenario. The methodology also explains how additionality will be tested for that
project category (see next page additionality section). In addition to requiring
projects to use approved baseline methodologies, however, the CDM rules spell
out three broad
approaches
that baseline methodologies should follow (see
section 2.2) These approaches cannot be used directly to develop the baseline
12
The Marrakech Accords and national rules and regulations determine the extent to which emission
reductions can be traded as certified emission reduction units (
CERs ) and used as �compliance tools�
toward emission reductions targets in Annex 1 countries.
13
Activities Implemented Jointly (AIJ) was a pilot phase for project-based emissions trading established in
1995 at the first Conference of the Parties. Under AIJ, industrialized and developing countries could develop
projects together, but no actual credits were created or traded.
Page 22
12
scenario and calculate emissions, but rather are principles that underlie a
methodology.
These three concepts are illustrated in Figure 0.1.
Figure 0.1
Relationship Among Baseline Approach, Methodology, and
Scenario
2.1.2
Project Boundaries and Leakage
GFR projects may either be part of larger and more complex energy infrastructure
investments or standalone activities that use existing infrastructure. Thus a
primary issue is defining the relevant extent of a CDM project in terms of its
impact on emissions and how they will be covered in a baseline and monitoring
methodology (that is, the project activity). The project boundary defines the
physical and geographic location of the project activity and the sources and gases
included in the project calculations. All GHG emissions that are
under the control
of
the project participants and are
significant
and
reasonably attributable to the
project activity
should be included within the project boundary (for example, a
project that delivered gas to an existing international pipeline network). In this
case, although the investment decision may consider international markets and
consumers, the CDM project boundary would almost certainly end with gas
processing and discharge into the pipeline, because the end use of the gas is not
under the control of the project owners.
Leakage is defined by United Nations Framework Convention on Climate Change
(UNFCCC) in the CDM context as �the net change of anthropogenic emissions by
sources of greenhouse gases (GHG) which occurs outside the project boundary,
and which is measurable and attributable to the CDM project activity
.
�
In other
words, in the CDM, leakage does not mean physical leakage as commonly
referred to in the oil and gas sector (for example, fugitive emissions from
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Year
408.8 548.9 6.7 5.4 0 : *
408.8 554.4 6.7 5.6 0 : +
408.8 560.0 6.7 5.4 0 : *
408.8 565.4 6.7 2.3 0 : \03
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408.8 591.8 6.7 4.6 0 : R
408.8 596.4 6.7 4.8 0 : Q
Baseline emissions
Project
implementation
: CDM project emission
: Year
958.7 958.7 9.5 5.4 45 : *
964.2 964.2 9.5 5.6 45 : +
969.8 969.8 9.5 5.4 45 : *
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999.2 999.2 9.5 2.3 45 : L
1001.6 1001.6 9.5 4.6 45 : R
1006.2 1006.2 9.5 4.8 45 : Q
Baseline emissions
Project
implementation
: Year
958.7 958.7 9.5 5.4 45 : *
964.2 964.2 9.5 5.6 45 : +
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Baseline emissions
Project
implementation
Page 23
13
pipelines) but rather impacts on GHG emissions that are outside the defined
project boundary. Leakage refers to changes in emissions because of the project
that occur outside the project boundaries. If an emissions source is within the
project boundary, then it is not considered leakage. Any emissions source that is
affected by the project, but not within the boundary, is considered leakage.
2.1.3 Additionality
One difficult aspect to define is the concept of additionality and its relation to
projects, baseline methodologies, and baselines scenarios. The CDM rules state
that a project activity is considered additional if anthropogenic emissions of
GHGs by sources are �below those, which would have occurred in the absence of
the registered CDM project activity.� The �additionality test,� therefore, is a
fundamental part in developing a project�s baseline emissions scenario, and the
baseline methodology must specify how this will be done. Using an approved
baseline methodology, however, does not automatically confer additionality on
the project�s emission reductions, but rather provides a means for testing for
additionality. In developing a methodology, the developer must describe how the
additionality of the emissions reduced by the candidate CDM project can be
determined through the application of the methodology.
In the main part of the PDD the project developer should explain the additionality
of a project in terms of why it is not included in the baseline scenario, that is, why
the project is not part of the reasonable description of the likely course of
development.
2.2 Approaches
2.2.1
Three Approaches in the Marrakech Accords
As illustrated in Figure 2.1, one way of understanding the process of establishing
a baseline scenario under CDM rules is to look at it moving from the general to
the specific. A
baseline approach
is the most general step in this process and
does not include any specific guidance on calculating baseline emissions and,
therefore, is more a principle than a tool. Three approaches for baseline
methodologies are provided in the CDM rules.
14
In section 3 of PDD-NMB,
project developers must select the approach that is most consistent with the
project type. The approaches are as follows:
�
Approach A:
Existing actual or historic GHG emissions, as applicable
�
Approach B:
Emissions from a technology that represents an
economically attractive course of action, taking into account
barriers to investment
�
Approach C:
Average emissions of similar projects undertaken in the
previous five years, in similar social, environmental, and
technological circumstances, and whose performance is in the top
20 percent of their category
14
The Executive Board has left open the possibility of adding approaches.
Page 24
14
The choice of approach has implications for the baseline methodology. For
example, choosing approach B would mean that the methodology would have to
address economic and financial analysis of the project in detail, while approach A
could incorporate issues such as barrier and common practice issues, as well as
economic information.
While the EB has stated that baseline methodologies should only choose one
overall approach, the additionality test may contain several different tools. As of
end May 2004, almost all new methodologies applied approaches A and B, split
equally between the two. Approach C was used by only one proposed
methodology. The proposed methodologies and approaches used are summarized
in Annex 6.
2.2.2
Suitable Approaches for GFR projects
According to the experts interviewed during this project, the choice of approach
will not be a key factor in the approval of the methodology, because the EB
recognizes that these concepts often overlap and that a methodology may draw on
several tools. Nevertheless, the baseline methodology still must choose one
approach. The advantage of using approach A for the upstream portion of a
project is that it provides a simple principle for constructing a baseline emissions
scenario. Although approach B has a greater focus on the economics of the
project, this might be combined with barrier test and common practice.
Because of the lack of data on a regional or national �control group� and the fact
that this data is typically confidential in the oil industry, approach C would be
problematic for a GFR project. If there are only one or two facilities in a region
that are already managing and using AG, these facilities could become the
baseline even if they are the minority. The exception might be very specific
technologies for improving flaring efficiency, but it is unlikely that major
investments would use this approach.
Many stakeholders have raised concerns that the baseline methodology for GFR
projects, while incorporating economic and financial assessments, should not use
economic analysis as the sole determinant of project additionality and baseline
development. Using approach A allows the baseline methodology to incorporate
additionality tests using economic attractiveness, other barriers, and common
practice. An example of this is the approved baseline methodology for industrial
fuel switching,
15
which uses approach A but also incorporates economic and
investment barriers into the additionality test.
One additional question is whether choosing approach A for GFR baseline
methodologies will work for green field projects
16
as well as brown field projects.
Given that current flaring and venting emissions per unit of AG production are
known for a brown field site, it would make sense to use these as the basis for the
baseline, as long as the additionality of the project is clear. Green field projects
lack documented current and historic emissions. A project developer, however,
15
See NM0016-rev Graneros industrial fuel switching project.
16
A green field project is an investment at a site where presently there is no associated gas (AG) production
and where AG production as a result of the project has to be managed.
Page 25
15
will know the key characteristics of the field and project (for example, gas
composition, likely flaring efficiency) in detail from feasibility studies and
testing. For green field projects, using this known data combined with
conservative standards (for example, 98 percent flaring efficiency) could be
nearly as accurate as actual or historic emissions, but this interpretation would
need to be tested with the EB.
17
Most of the baseline methodologies submitted to the Baseline and Monitoring
Methodology Panel (Meth. Panel) thus far use economic analysis as part of their
justification for the project, including the approved methodology for the Rang
Dong project (see Annex 5 and 6). This is not a contradiction, even if approach A
was proposed. In many cases the primary reason for the economic analysis is to
establish project additionality, which may use economic arguments regardless of
the selected approach.
2.2.3
Projects Already under Way
Whether the implementation status of the project (that is, whether it is already in
operation) affects the choice of approach or the development of the methodology
has been raised by several stakeholders. While special provisions were made for
projects that commenced operation between the January 2000 and December
2001,
18
and projects under way are not excluded from the CDM, the practical
challenge for methodologies and project developers is to comply with section B.4
of the PDD. This asks for an �explanation of how and why this project is
additional and therefore not the baseline scenario.�
Methodologies can be designed so that they can apply to either projects under
consideration or projects already under way. This is already happening in several
proposals where a series of barrier tests are being proposed that would include not
only financial viability but also capital availability, institutional barriers, and so
on. The comments by the Meth. Panel on the Rang Dong project methodology (as
well as one for cement kiln replacements), and discussions with experts, suggest
that the implementation status of the project will not affect the review of the
baseline methodology. Clearly applying additionality tests based on project
economics and common practice will be important at the stage of submitting a
PDD, however, because this could show that the project was a higher cost option
or unlikely to be implemented under normal local and regional business practices
and, thus, not part of the baseline.
2.3 Guiding
Principles
The analysis of decisions and reviews of the baseline methodologies submitted
thus far to the Meth. Panel identified several key lessons and principles that
17
Because the principle component of both green field and brown field GFR projects is the forecast of gas
production, the actual degree of uncertainty between the two types of projects could be very small.
18
The CDM modalities and procedures (paragraph 13, p. 23, FCCC/CP/2001/13/ad2) allow for projects
begun in 2000 and 2001 to be eligible for validation and registration as a CDM project activity if submitted
for registration before December 31, 2005.
Page 26
16
should guide project developers in proposing new baseline methodologies. These
general guidelines for developing a methodology are as follows:
�
Keep the methodology simple
: Complex approaches that are difficult to
understand and illustrate are not well-received with reviewers. For
example, methodologies involving energy sector models have been
criticized as impenetrable �black boxes� that are difficult to
understand. Conceptually simple, transparent methodologies with
well-defined applicability have been among the first to be
approved.
�
Incorporate elements from approved methodologies
: To a large degree,
CDM methodologies are being developed on a precedent basis, so
if elements of approved methodologies can be incorporated into a
new proposal, this should serve to validate the consistency of the
new methodology with previous applications. For example, if a
GFR project has downstream emission reductions from fuel
displacement at an industrial site, an approved industrial fuel
switching methodology could be incorporated for that component
of the project.
�
Using multiple additionality tests
: As will be discussed in section 3.3, a
methodological argument is strengthened through a combination of
tools�� such as market and/or regulatory barriers, economic and
financial assessment��and common (prevailing) practice.
Together, these arguments should be employed to show that the
project activity is additional and, thus, not the baseline.
�
Ensure the methodology is conservative
: As required by the Marrakech
Accords, baseline methodologies should be demonstrably
conservative. This means that if more than one methodology (or
algorithm, factor, or assumption) could be applied appropriately,
then the one that generates the least emission credits should be
used.
�
The methodology should be based on project experience
: While a
methodology should not incorporate project-specific information,
the scope should not be too general. For example, the power sector
methodologies generally have been for a particular technology and,
in some cases, had additional restriction on the applicability. The
proposed new baseline methodology format also asks for the
�conditions under which the methodology is applicable to CDM
project activities,� where the proponents can specify how broadly
the methodology can be applied within the sector.
�
Emphasize the monitoring plan
: The baseline methodology should be
accompanied by a monitoring plan applicable to the project. The
monitoring plan should include provision for collecting data
necessary to calculate emissions reduction accurately, including ex
post calculation of emissions factors when appropriate.
19
In this
19
While monitoring should be used to track impacts, such as fugitive emissions from production, processing,
and transport, the EB has cautioned against the use of ex post emissions factors for power generation (EB9
Page 27
17
way, the baseline methodology provides the rationale for
additionality, while the monitoring methodology shows how to
calculate carbon credits.
�
Incorporate national policies
: The methodology must include a
component that explains how the CDM project scenario and
baseline scenario will be tested for conformity with national and
sectoral policies of the host country.
2.4
Scope and Number of Methodologies
As previously mentioned, one of the key issues in defining methodologies is the
scope. How broadly applicable should a given methodology be across different
sectors, technologies, regions, and so on?
20
Should it, for example, be applied to a
particular technology or restricted to that technology in countries with certain
regulatory environments?
When proposing a baseline methodology, proponents must specify the
applicability of the methodology (section 1.3 of PDD-NMB), and this is a key
area where the Methodology Panel provides recommendations to the EB on new
methodologies. This is particularly important for GFR projects, because this
sector spans a number of complex project types, which are further described in
this section
2.4.1
Emissions Sources from the Gas Value Chain
In addition to the flaring of AG itself, three basic categories of GHG emissions
occur along the gas value chain: vented gas, fugitive emissions, and emissions
from combustion for energy use. These emissions occur at the three primary
stages in the gas value chain: production and processing, transport and
distribution, and end-use consumption, as shown in Figure 2.2.
21
Venting
occurs when AG from the oil wells is released directly into the
atmosphere as methane (CH
4
). Given that CH
4
is 21 times more powerful as a
GHG than carbon dioxide (CO
2
), even a small amount of venting has a relatively
large impact on climate change. Even if the AG is routinely flared, not all will be
combusted and converted to CO
2
��a fraction will be vented. International studies
suggest that best-practice flare efficiency is 98 percent, which means that 2
percent of the gas is vented.
22
Report, Annex 3, page 2). For downstream baseline methodology modules, therefore, emissions factors
should be established ex ante and reported in the PDD, using the protocols laid out in the baseline
methodology.
20
If methodologies are too narrow, the number of methodologies could be too large, causing difficulty in
determining the appropriate methodology for a given project and reducing the ability to lower transaction
costs. Conversely, if methodologies are too broad, they may not sufficiently capture the specific
characteristics of a given project and, thus, be less accurate at projecting baseline emissions.
21
Although these three stages can be further broken down, it is not necessary for the purposes of the baseline
methodology; we have simplified the presentation of the value chain.
22
It should, however, be noted that actual flare efficiency can vary substantially depending largely on wind
speeds. See The Flare Research project at University of Alberta at
http://www.mece.ualberta.ca/groups/combustion/flare/index.html
Page 28
18
Fugitive
emissions refer to unintentional emissions from leaky valves, loose dry
seals in compressors, flanges, and intentional venting away from the production
site. Gas is normally vented to prevent a dangerous build up of pressure in the
system, or to release gas to undertake maintenance on a section of the system.
Fugitive emissions of CH
4
also occur during loading and unloading of liquefied
natural gas (LNG) carrier vessels.
Combustion
either along the production chain or at the point of end use is the
third source of emissions. The equipment that drives the gas production,
processing, and transport system, including LNG processing, is generally powered
by a portion of the gas produced, so the operation of this equipment leads to CO
2
emissions. CO
2
is also released when the gas is consumed as a fuel by the final
end user.
Page 29
19
Figure 0.2
Emissions Sources along the Gas Chain
Flaring and venting
Energy
use
emissions
Fugitive
emissions
2.4.2
Options for Developing AG and Impact on the Gas Value Chain
All of the development options for AG begin with the capture of the gas at the
production site, rather than allowing it to be flared or vented. What happens to the
gas after capture depends on a variety of factors, including upstream conditions,
such as field characteristics and the oil-to-gas ratio, downstream market
opportunities for the recovered gas, and the legal and fiscal frameworks that may
include various incentives and penalties. Major options that would be evaluated
include the following:
�
Capture and transport by pipeline to end users.
�
Reinject the gas at the site.
�
Process the gas into liquids (for example, Liquefied Natural Gas [LNG],
gas-to-liquids [GTL], or liquefied petroleum gas [LPG]) that can
be transported and sold locally or internationally.
Capturing gas at the production site will result in the largest amount of the
emissions reduction, as illustrated in Figure 2.3. Switching fuels at the point of
end use could also reduce emissions, depending on the amount of carbon in the
replaced fuel and the efficiency rates. Because the project infrastructure for
capture and transport in most cases does not exist in the baseline, some increase in
emissions from processing and transport may occur, but this should not overly
affect the net carbon emissions reductions.
The impact on emissions at each step will need to be calculated to arrive at net
emissions changes. Even reinjection may essentially be similar to capture and
transport projects, if the reinjected gas eventually is extracted and marketed. The
difference is in the timing of the emissions reductions, and this likely will be
outside of the crediting period for a CDM project in any case. Although emissions
may occur eventually, for purposes of this document, the gas is captured and not
burned.
Production
Processing
Transport
Consumption
Page 30
20
Figure 0.3
Examples of Emissions Impacts along the Gas Chain
Increase
Emissions
Baseline
Decrease
Upstream
Midstream
Downstream
Flare/venting
elimination
Fugitive emissions
& energy use
Fuel switching
Increase
Emissions
Baseline
Decrease
Upstream
Midstream
Downstream
Flare/venting
elimination
Fugitive emissions
& energy use
Fuel switching
Emissions
Baseline
Decrease
Upstream
Midstream
Downstream
Flare/venting
elimination
Fugitive emissions
& energy use
Fuel switching
2.4.3
A Modular Approach to Baseline Methodology
Given that all GFR reduction projects have common elements and can affect one
or more of the three sectors in the gas value chain, developing algorithms for each
of these sectors will simplify the process of baseline development and project
validation. A project developer that proposes a new methodology could draw on
previously developed elements in designing a methodology for a new project
type. This would accomplish two goals: (1) the methodology still would be fairly
narrow and project based; and (2) by drawing on elements that are already
available (in the form of concepts and frameworks or fully developed
methodology element), the methodology will take less time and effort to develop
and be more consistent with other approaches in the sector.
2.4.4
New Upstream Elements
Because Rang Dong is the only methodology approved at this point, and its range
of applicability is not yet known, upstream project proponents probably will
choose to propose new methodologies. The net upstream baseline emissions are
just those from the gas that would be flared and/or vented
��it is only the project
case in which we must net out the emissions increases in transport and
processing.
23
The issue of processing facilities will be dependent on the project
but could be a separate segment of the methodology, at least for LNG and GTL.
In terms of emissions from venting and flaring, the amount of emissions would be
based on gas production, the composition of the gas, and flare efficiency. The
composition and flaring efficiency could be used to calculate a standard emissions
factor related to gross AG production (for example,
tCO
2
-equivalent/million cubic
meters [MCM]). If the project is a green field site, gas composition would still be
known but flaring efficiency would be estimated based on industry standards and
23
For a brown field project, the historic emissions serve as the basis, while for a green field project the
emissions are a project based on tests and production forecasts.
Page 31
21
similar regional sites. To be conservative, a high flare efficiency should be used,
although not necessarily 100 percent (all the gas is combusted) as in the Rang
Dong methodology (see Annex 5).
Fugitive and combustion emissions from the production site would be based on
either historic measurements for brown field sites or on appropriate industry
standards for green field sites. Even if no processing, transport, and distribution
infrastructure is constructed as part of the project, these emissions would need to
be monitored and included in the monitoring methodology.
2.4.5 Downstream
Modules
A modular approach should be adopted, with downstream components being
added to the core upstream component. A number of modules can be developed
that address downstream components of projects.
�
For grid-connected power generation, projects could draw from El Gallo
methodology (NM0023), which uses a combined margin
methodology
24
and is quite comprehensive, or from the monitoring
methodology for Durban landfill gas project, which uses average
grid emissions calculated ex post (the second monitoring
methodology under NM0010-rev). These are described in more
detail in Annex 4.
�
For fuel switching, Graneros methodology for industrial fuel switching
(NM0016) has been approved; this methodology is applicable for
fuel switching from coal or oil to gas.
�
For energy efficiency of compressors, project developers could draw on
the small-scale CDM rules for industrial energy efficiency.
25
Although developers would still need to propose a new
methodology for large-scale efficiency projects, they could draw
on accepted procedures for small projects as a starting point.
24
The �combined margin� approach means that both the impact of the project on current grid dispatch
(�operating margin�) and the impact on the development of the power sector (�build margin�) are used to
estimate the overall impact of the project on power sector emissions. For small CDM projects, for example,
project developers can simply use the average of the build margin and operating margin emissions factors as
their baseline emissions factor. See
Practical Baseline Recommendations for Greenhouse Gas Mitigation
Projects in the Electric Power Sector
, 2002. Organization for Economic Cooperation and Development
(OECD) and IEA Information Paper, International Energy Agency, Paris.
25
See Appendix B
Simplified Methodologies for Baseline Determination and Monitoring Plans for Small-
Scale Projects
, available at
http://cdm.unfccc.int/pac/howto/SmallScalePA/index.html
.
Page 32
Page 33
23
Additionality
This section explains how CDM baseline methodologies should address the
concept of additionality as well as the process and tools that can be used to test for
additionality.
3.1
Additionality in Baseline Methodologies
As discussed in section 2.1, additionality means that the project is not in the
baseline and that the emissions from the project scenario reduce emissions below
the baseline scenario. The latter concept is articulated in the CDM rules, which
state that a CDM project activity is additional if anthropogenic emissions of
GHGs by sources are
below those, which would have occurred in the absence of
the registered CDM project activity
.
26
The former concept is articulated in section
D.3 of PDD-NMB, which asks for an,
�explanation of how, through the
methodology, it can be demonstrated that a project activity is additional and
therefore not the baseline scenario.� The centrality of this issue is shown by the
fact that five of the first eight nonapproved methodologies were rejected because
they did not provide sufficient basis to establish that the project was not part of
the baseline.
27
The baseline methodology must lay out the means by which to test the
additionality for particular projects. For example, the methodology can specify a
list of questions to be addressed or contain a flow chart to demonstrate the
additionality of the project. When completing the PDD, the project developer
applies the tests in the methodology to the specific characteristics of that project.
The designated operational entity (DOE) will validate the assumptions used by
the project developer and check that they have applied the baseline methodology
correctly to test for additionality.
3.2
Tools for Demonstrating Project Additionality
To ensure that the additionality component is addressed rigorously and clearly in
the methodology the EB has recommended four tools to be used:
28
�
Tool 1:
A flow chart or series of questions that lead to a narrowing of
potential baseline scenario options
�
Tool 2
: A qualitative or quantitative assessment of different potential
baseline scenarios and an indication of why the non-project is more
likely
�
Tool 3:
A qualitative or quantitative assessment of one or more barriers
facing the proposed project activity
26
Marrakech Accords, Decision 17 /CP.7, Section G, paragraph 43.
27
NM0006 El Canada Hydroelectric Project, NM0008 Penas Blancas, NM0009 Risk Husk Power
Displacement of Grid Electricity, NM0011 Bagasse biomass cogeneration, Koppa, NM0014 Risk Husk
Power Displacement of Stream, NM0015 Rice Husk Power Methane Avoidance.
28
See report from the Tenth Meeting of the EB, at http://cdm.unfccc.int/EB/Meetings.
Page 34
24
�
Tool 4:
An indication that the project type is not common practice in the
proposed area of implementation
These tools are not meant to be exclusive but rather represent four ways to
address and justify additionality. The tools are designed to be used in concert, but
in certain cases, one of the tools could be so definitive concerning additionality
that the other tools are not needed or relevant. Of the approved methodologies to
date, most use more than one tool, and while the new PDD format implies that
more than one will often be necessary, there may be cases where one is sufficient.
The baseline methodology should clearly identify which additionality tools will
be used and how, so that each project using the methodology would then insert
project-specific data and parameters into the tests to determine the additionality of
that particular project. The additionality test, when applied to the relevant
parameters and characteristics of project, clearly shows whether that project
would be implemented for existing and identifiable reasons.
3.2.1
Framework for Use of the Tools
Figure 0.1 below illustrates how the four tools could be used in a sequential
approach. Note, however, that methodologies do not all have to include all four
tools. In cases where more than one tool is applied, different methodologies will
use a different combination of tools, and they might be given different priorities
or weightings (see discussion in section 3.2.6 of this document on multiple
additionality tools). The EB does not provide advice on the sequence by which the
tools should be applied. The appropriate sequence may vary from one project
category to another.
The
first tool
narrows the potential baseline options considered as permissible
and plausible development options for AG. Often reference is made to three sets
of screening criteria: (a) regulatory requirements, (b) geophysical conditions, and
(c) technological feasibility. Regulatory requirements are central in the context of
GFR projects because many developing countries have stringent flaring
regulations, particularly for green field projects. This needs to be addressed in
PDD-NMB and is discussed in greater detail below.
The
second tool
is a quantitative and qualitative assessment of the plausible and
permissible options identified by the first tool. In the case of a green field project,
this would typically be a comparison between various options for handling the
AG, such as flaring and venting, reinjection, liquefaction, or pipeline transport for
downstream use. Normally, the most attractive project option, if feasible from an
investor�s perspective, would be considered the most likely option and, hence, the
baseline scenario. In the case of a brown field project, the comparison generally
would be between continued flaring and venting and one or more of the other
options identified as plausible and permissible by the first tool. In this case,
ranking of options according to economic attractiveness is more complex than for
green field projects because continuing �business-as-usual� activity (for example,
the baseline scenario of continued flaring and venting) does not require
investment. Therefore, comparing the economic attractiveness of the different
options may not be as straightforward as for green field projects.
Page 35
25
Figure 0.1
Tools to Test Additionality*
Narrowing of Baseline Options
Plausible and permissible AG development options
�
Regulatory requirements
�
Technological feasibility
�
Geophysical conditions
Qualitative or Quantitative Assessment
�
Green field: compare attractiveness of investment options
�
Brown field: compare investment against �business-as-usual� based on a suit of
relevant economic and financial indicators
Barriers Analysis
�
Domestic fuel prices, risk related to local markets
�
Fiscal regimes, PSA, and other regulatory risks
�
Technological and implementation risks
Reference to Common Practice
�
Empirical evidence of common practice required
�
Not a standalone tool?
* NOTE:
This figure illustrates the use of these tools. However, as noted above, no specific
sequence may be appropriate for all GFR project categories. (�The Greenhouse Gas Protocol:
Project Quantification Standard,� developed by WRI and WBCSD, recommends that barriers
analysis should be conducted before any economic and financial assessment, and the latter only
be applied if the barriers analysis does not give any conclusive result.)
Quantitative and qualitative assessment may provide a definitive answer as to
which option is the most likely and, hence, the baseline. For brown field projects
in particular, however, supplementary testing is often required. Options that are
deemed attractive based on the second tool, for example, may in the end be
unattractive and/or unlikely when barriers and common practices are considered.
Tentative conclusions based on the second tool may therefore be inconclusive and
necessitate the application of the
third and fourth tools
. Again, however, it
should be stressed that, depending on the project category, one tool may be
sufficient and others not relevant.
The description above gives a description of how the tools can be used in the case
of GFR projects. Any actual baseline methodology, however, needs to be more
specific on the key characteristics of the project category to which the
methodology is applicable. This framework, and further considerations on these
tools, is meant to help the project developer apply the tools to additionality
testing.
3.2.2
Regulatory Requirements
The reason for assessing regulatory requirements, as well as technical feasibility,
is to ensure that the project is not a priori prohibited from being additional. For
gas flaring projects, this is often determined by law. If flaring is not allowed, then
extinguishing the flare is obligatory and, therefore, the project is not additional.
Yet even a legal prohibition can be ambiguous, particularly if it is not enforced or
exemptions are granted. In some countries, flaring is prohibited but still accepted
to maintain oil production, or the fines imposed are so low that flaring continues.
Page 36
26
In essence, the first tool acts to verify whether the proposed project investment is
already required, either de jure or de facto.
3.2.3
Economic and Financial Assessment
Given that a project passes the first set of criteria, the issue is to determine
whether a project exists that would be viable and implemented based on a normal
business analysis of the project developer. While this is normally a question as to
whether the project justifies investment from an economic standpoint, it can also
include issues related to the project�s position relative to overall company
priorities and strategies.
Economic and financial assessment has been prominent in discussions on
additionality for all project types. In the case of flare reduction projects, it is often
assumed that AG is flared because the economic benefits of capturing and
transporting the gas to market are not sufficient to justify the investment. Factors
that may provide disincentives for recovery and marketing of gas can include the
following:
�
High infrastructure costs.
�
Development costs.
�
Limited local markets that necessitate large investments (such as LNG)
to reach international markets.
�
Relatively small quantity or value of the gas compared with the oil.
�
Limited value (or different ownership) of the gas in areas that are
developed as oil concessions.
The implication is that the financial return in such projects is below that required
by a prudent investor to justify the investment.
While financial return is important, other factors may be equally relevant in
making capital allocation decisions. Companies and investors operate under
capital constraints, and the estimated financial returns of such projects may not
justify the diversion of capital from high-return or more strategic projects.
Financial and economic measures, such as internal rate of return or net present
value, are based on assumptions and the specific financial and policy regime
under which the developer works. Any one measure may not provide an accurate
understanding of the project�s overall economic and financial status. Therefore,
care should be taken in using such measures and the assessment should be as
robust as possible. For example, a developer wishing to show why a project is not
in its business-as-usual scenario could demonstrate that the following:
�
The project is below the financial returns normally required for a project
of this type and in this risk category.
�
The project does not contribute significantly to the firm�s operational
and strategic priorities.
�
The firm�s capital limitations do not justify development of the project at
this time.
Another important point is that most AG flaring projects will be in concession
areas. In many concessions, the legal requirements are such that the only potential
CDM project developers are the existing partners whose return from the project
might differ substantially among one another (this is particularly true when the
Page 37
27
state is a partner or cases in which gas pipelines are owned by outside interests).
Furthermore, cases exist in oil concessions in which ownership of the AG is
different than that of the oil and, thus, any CDM project economics could differ
among partners. This is exemplified in the most extreme case in which the AG
belongs exclusively to the state and the private partners derive no benefit from its
sale; the legal requirement, however, could well be that the partners must share
equally in all investments.
Finally, the use of any single project economic indicator is directly influenced by
the financial regime under which the project falls and the financial status of the
investor. For example, AG projects in areas that have higher taxes are a priori
more marginal than those in low tax areas. To the investor, the financial return of
any one project is dependent on the company�s overall tax situation and its cost of
raising money. Such factors suggest that any the financial indicators used to test
for additionality often will vary by location and investor. Additionally, subjective
but necessary assessments of geologic, political, and price risks add an additional
level of complexity to investment decisions.
It is suggested that the test for additionality related to economics should be based
on a suite of economic and financial indicators that clearly demonstrate why the
project would not be implemented.
3.2.4 Barrier
Analysis
Barrier analysis can be thought of as those factors that are outside the direct
control of the project proponent and yet impact the project�s likelihood of
implementation. Some of these factors can be economic, such as when the
domestic gas price is controlled by the host government at a level below that
needed to justify the investment in gas recovery. The fiscal regime may be
designed for oil and thus provide de facto disincentives for gas recovery or even
assign the ownership of the gas to a different entity than the operators of the field.
A lack of access to capital may prevent project implementation (regardless of the
project�s economic attractiveness).
�
A proposed new technology may have higher technological and
implementation risk, higher operating cost, less experience, and
greater performance uncertainty than the baseline technology.
�
Local market conditions, institutional weaknesses, or structural issues
(for example, lack of open access to the gas transmission lines)
could prevent implementation of certain projects.
�
Limited information, managerial resources, organizational capacity, and
so on could affect project implementation.
Barrier analysis can be a critical factor in justifying many CDM AG investments
but are, by nature, specific to the area, regime, or type of project. Thus, a
methodology needs to identify and provide a general means to analyze and
measure the impact of such barriers in determining the baseline scenario.
3.2.5 Common
Practice
In some cases, common practice
could be a major deterrent to capture and
transport of AG, especially in smaller fields. A company can have a standard
Page 38
28
practice to flare AG that is small in volume or distant from the existing gas
infrastructure.
To present such a factor within additionality tests implies that the existence of
such a practice could be documented, and reference should be made to companies
other than the project developer and its established practices.
3.2.6
Using Multiple Additionality Tools
All the tools discussed are useful and can have a place within a methodology. To
date, the approved methodologies generally use more than one of these tools, and
some include all four. If more than one tool is used, the methodology should
indicate (a) whether answers are needed for all of the tests, (b) the order in which
the tools should be applied, and (c) the role of different tools in addressing
various aspects of additionality.
Often, but not always, economic and financial analysis has been an important
factor in CDM proposals (refer to Annex 6 for a list of EB projects submitted up
to 1 April 2004) for demonstrating additionality since CER revenues to a project
increases its economic rationale. However, it is possible to develop the CDM case
without economic analysis. The key point is: the methodology needs to recognize
that any such test needs to cover a range of indicators and be balanced with an
analysis of other barriers to the project.
In addition, economic issues can play a major role in other barriers. For example,
if a controlled domestic market for gas results in low gas prices, it clearly is a
market barrier with direct implications on a project�s economics. Indeed almost
all the barriers, except the purely technical, have economic implications that are,
or can be, addressed by economic means.
29
3.3 Considering
Country
Policies
The CDM rules state that baselines should take into consideration national
policies of the host country, and the EB has given the Meth. Panel the task of
clarifying how this should be implemented in baseline methodologies. The
evaluations of new methodologies explicitly ask how factors such as national
policy have been considered (refer to Annex 8). As noted above, national policies
and, in particular, flaring regulations are also addressed in the PDD-NMB.
These considerations are particularly important for GFR projects, because many
countries in the developing world have or are likely to implement laws preventing
flaring, and this could make flaring reduction projects in those countries non-
additional��albeit in many countries such legislation applies only to green field
projects, and, in a number of cases, legislation is not enforced or does not change
operational practices.
The general consensus among experts consulted in this project is that national
policies of the host country will almost certainly be considered, because
considerable language exists in the Marrakech Accords regarding national
circumstances in baselines. As discussed in the GGFR Report No. 2 on the Kyoto
29
For example, the risk of a project is often offset not by reducing the risk but by requiring a higher
economic return to compensate for that risk.
Page 39
29
Mechanisms, statements, commitments, and targets for flaring reductions might
be incorporated into an additionality assessment. Generally, they are indicative of
the baseline for flaring, but, because the types and implementation of policies can
vary greatly, this does not mean that they automatically exclude a project on this
basis.
Most countries have instituted direct regulations, although application and
implementation differ significantly. In almost all oil-producing countries, flaring
may take place only after it is authorized by a regulatory body. When authorized,
flaring is subject to a variety of conditions. Emission standards and technical
requirements may help to provide a concise description of the baseline conditions,
so that if an investment/technology does not offer greater flaring reductions than
mandatory standards do, the project is not additional.
However, direct regulation of flaring is often ambiguous; and physical,
technological, and economic opportunities to avoid flaring will typically vary
from site to site. Regulations may restrict flaring only where it is economically
viable to do so, in which case a CDM project in such an area could be considered
additional. While technical and economic assessments of this sort form the basis
for flaring prohibition or permits, the rigor of such assessments differs greatly
among countries.
It is important to judge whether national policies are binding regulations on
producers or softer policy aspirations to meet certain targets. For example, it is
one thing for a national government to state that they want to progressively phase
out flaring by 2008, but another for the government to make it illegal to flare after
that date, with binding and enforceable consequences.
3.4
Regarding a Voluntary Standard
In May 2004, GGFR partners endorsed a Global Gas Venting and Flaring
Reduction Voluntary Standard. The Standard outlines a plan of action, including
adoption within one year of the Standard by partner companies and countries.
This Voluntary Standard,
30
at the outset should not influence the baseline for flare
reduction activities. It is a process not a fixed target and should be seen as an
aspiration a means to achieve reduction and, eventually, elimination of flaring.
One way to achieve this aspiration objective is to use the CDM. The CDM can
make an important contribution to stimulating investments in flaring reductions;
hence, it can also make an important contribution to objectives of the GGFR
Voluntary Standard. When relevant, project proponents can reference the
Standard in the baseline methodology and clarify how it relates to the
additionality assessment.
30
GGFR Report No. 4,
A Voluntary Standard for Global Gas Flaring and Venting Reduction
, May 2004.
Page 40
Page 41
31
Project Boundary and Leakage
This section explains how to set the project boundary and related leakage issues
for GFR projects and recommends how these can be best addressed in baseline
methodologies. Leakage is defined as the net change of GHG, which occurs
outside the project boundary and which is measurable and attributable to the
CDM project activity. Project boundary and leakage are interrelated because
emissions outside the project boundary that are directly influenced by the project
are considered leakage and must be identified. These issues are addressed
primarily in sections 4.5 and 4.8 of PDD-NMB.
4.1
How to Determine the Project Boundary
4.1.1 Principles
Determining CDM project boundaries is naturally a project-specific exercise. The
baseline methodology must, however, specify the process and principles to be
applied to determine the boundary for the category of projects covered. The
project boundary should include all GHG emissions that are:
�
Under the control of the project participants
�implies direct control or
influence, including, where appropriate, the scope of Production
Sharing Agreements.
�
Significant
�determined as significant if they can be calculated with a
reasonable level of accuracy (for example, to be more 1 percent of
the total emissions/emission reductions of the project).
31
�
Reasonably attributable to the GFR project activity
�closely linked to
�control over,� and project developers may wish to consider the
boundary of the gas infrastructure or investment made for the GFR
component, or the capture, transport, and utilization of the AG.
32
When applying these principles, the key issue is the extent to which the project
partners control different stages of the gas value chain. The following subsections
apply these principles to different project types.
4.1.2 Project
Types
For the GFR projects categories considered in this report, the project participants
control the upstream activities, including processing. These activities normally are
the key components of the investment and give rise to the largest emissions
reductions. In addition, any transport and distribution infrastructures that are
constructed for the project may also be significant components of the investment.
31
This is a rule of thumb used by the Dutch Certified Emission Reduction Unit Procurement Tender
(CERUPT/ERUPT) guidelines, and this rule is included in one of the approved methodologies (NM0021
CERUPT methodology for landfill gas recovery). Some of the concerns pointed out in this section may, in
the end, not be deemed material to the project and, thus, not pass a significance test. As the CDM process
develops, more guidance should be forthcoming on what constitutes appropriate project boundaries.
32
These points are based on Decision 17/CP.7, Draft decision article, Section G, paragraph 52. The EB stated
in its fifth meeting that it would develop further guidance on the terms of �under the control of,�
�significant,� and �reasonably attributable.� At the time of writing, this guidance has not yet been published.
Page 42
32
For investments in
reinjection
, the project boundary would include the
production site and any processing requirements. Because the Meth. Panel asked
that the Rang Dong methodology include onsite fugitive emissions within the
project boundary, these should be included for all projects.
For projects that
capture
and
transport
the gas for
end-use consumption
, the
transport and distribution infrastructure may be included within the boundary, but
whether the end-use site is included will depend on the contractual arrangements
among project partners. The expert reviewers of the Rang Dong methodology
recommended that the fugitive emissions from the pipeline and compressor
combustion emissions be included in the boundary. While small, the emission in
the Rang Dong case were judged to be under the control of the project participants
and directly attributable to the project activity.
33
To determine whether to include the end-user site within the project boundary, the
following questions should be asked:
�
Are project partners for the upstream project also the investors in the
downstream activities?
�
Do the contractual arrangements between the end user and gas supplier
give the supplier the right to monitor the use of the gas (so it can
be attributed to the project) and the right to the CERs that result
from the emissions reductions at the end-use site?
�
Is the gas supplied to a single dedicated point of end use in which case
the end user could possibly be included within the boundary?
If any one of these questions is answered in the affirmative, then the end-use site
may be included in the project boundary. In the case of the first question, it is
because the project partners own at least part of the whole value chain, and thus
the emissions from that chain are under their control. In the case of the second,
monitoring the impact of the gas means that the project participants can justify
that the emission reductions are attributable to the CDM project activity. The third
question determines whether the emissions reductions can be attributed to the
project with certainty, although some form of monitoring would be needed in this
case. If the gas is discharged into a pipeline network that feeds multiple end users
and has multiple sources, then it is more difficult to attribute changes at these
various sites to the CDM project activity.
The first two questions also identify who is considered a �participant� in the
project. The official CDM glossary defines project participants as, �parties or
private and/or public entities that take decisions on the allocation of CERs from
the project activity under consideration.� This means that national law on
allocation of CERs and contractual arrangements regarding CER ownership are
key determinants of who is a project partner and in setting the project boundary.
Capture and processing of liquids
is treated similarly to any other project that
supplies gas for end-use consumption. The project boundary may include the
production site, processing, and loading onto a tanker. These activities normally
are all under the control of the project developer. To determine whether the end
33
The transport infrastructure for Rang Dong was built specifically for this project.
Page 43
33
user of the liquids should be included in the project boundary, the project
developer would ask the same three questions.
4.1.3 Multicountry
Projects
A project may include more than one country (for example, capture of gas in one
country and use of it in a neighboring country). For example, the West African
Gas Pipeline project�s flaring reductions occur in Nigeria, whereas fuel switching
from diesel to natural gas for power generation could be achieved in Benin, Togo,
and Ghana.
34
One issue is the role of national Designated National Authorities
(DNAs) in approving the PDDs for such multicountry projects. No case has yet
looked at how carbon credits would be approved and allocated in such instances,
especially if one or more of the host countries had not ratified the Kyoto Protocol.
Until sufficient precedence is established, these issues will probably be addressed
on a case-by-case basis. This would depend on the location and contractual
arrangements among the various project participants. Nothing stops the same
project developer from submitting a CDM project in the individual host countries,
and the overall project does not need to be treated as a whole entity. In some
cases, this may be easier, because it would not require negotiations among
countries about credit ownership and would simplify the legal and contractual
process��and the project developers would still earn all of their credits. Actual
project proposals evaluated by the Meth. Panel and EB will set the precedents for
how these issues will be addressed.
4.2
How to Determine Leakage
The question of leakage is closely linked to the definition of the project boundary.
Leakage is defined in the United Nations Framework Convention on Climate
Change (UNFCCC) CDM glossary as �the net change of anthropogenic emissions
by sources of greenhouse gases (GHG) which occurs outside the project
boundary, and which is measurable and attributable to the CDM project activity
.
�
As previously noted, in the CDM context, leakage does not mean physical leakage
(for example, fugitive emissions from pipelines) but rather impacts on GHG
emissions that are outside the defined project boundary.
If the GFR investment affects emissions downstream, then this could constitute
leakage. However, in practice, this is unlikely to be common, because in cases
where it is possible to measure the impacts downstream, the project proponents
are likely to include the end-use site in the project boundary; thus, these emissions
reductions will not be leakage. It is not that these emissions are not significant as
leakage, but that they are encompassed within the project boundary and counted
as project emissions, not leakage.
If the downstream emission cannot be quantified, then the changes in emissions,
while outside of the project boundary, are not �measurable and attributable� and,
therefore, cannot be counted as leakage. For example, if the gas captured goes
into a pipeline that has multiple sources and multiple users, then the impact of the
34
A short description of West African Gas Pipeline as a GFR project can be found in GGFR Report No. 2
Kyoto Mechanisms for Flaring Reductions
.
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34
gas on end-use emissions is not quantifiable. This, therefore, could not be treated
as leakage.
One leakage issue for GFR projects raised by some stakeholders is the impact of
reinjection on current oil production (through enhanced oil recovery) and
future/postponed production of gas. It is unlikely that these increases in
production are measurable and can be attributed to the project as leakage.
In terms of local market impacts, the project developers should demonstrate that
gas from the project is not significant enough to affect local market prices and
demand by showing that the increase in gas availability is not significant and will
not change the supply-demand balance. Additional information provided by the
Rang Dong project developers in response to Meth. Panel comments, for example,
demonstrated
��through comparison with local demand��that the supply of gas
products from the project were insufficient to impact price or consumption
In cases where the downstream consumption is not known or under the control of
the project developers, there still may be fugitive emissions along the transport
system that should be considered, perhaps even with emissions from LNG
tankers. The question is whether these emissions can be measured and whether
they are attributable to the project activity. For example, they should be estimated
as leakage if initial calculations suggest that they are more than 1 percent of total
project emissions. This 1 percent significant rule has been used by several
proposed methodologies (see footnote 28).
Gas deliveries into the international market or integrated pipeline networks with
no dedicated user of the gas normally would be outside the project boundary.
These also would not be considered leakage because it would not be possible to
measure the impact of an individual input on consumption demand patterns of the
overall market. Whether standard leakage rates from these pipeline systems would
need to be considered when calculating the net impact of flaring reduction
projects is not clear, but this most likely would depend on whether the captured
gas affected the overall volume transported by the pipeline and whether the
pipeline operated within international norms concerning losses.
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35
Data and Monitoring
The purpose of this section is to identify the key parameters, data, and monitoring
issues for GFR methodologies.
5.1 Key
Parameters
Sections 4.6 and 4.7 of PDD-NBM require that the developer elaborate and justify
all of the formulae, algorithms, variables, and parameters that are used in the
baseline methodology, while section 5 should contain specific data and
assumptions used. Any standard values should be reported here.
For GFR projects, AG production is the key variable in terms of assessing
mitigation potential. Because AG production levels and characteristics can change
over time, all of the methodologies should lead to some form of standardized, or
rate-based, baselines. This means that baseline emissions would be related to
activity level (that is, production). For example, emissions from flaring AG could
be expressed as tCO
2
/MCM of gas production. Setting a standard emission factor
for the baseline means that the credits awarded to the project can be adjusted
based on actual gas production, so any uncertainty in ex ante production
projections will not affect the actual number of CERs issued.
If the baseline emissions factor is fixed, the monitoring for the project should
establish the project emissions per MCM of gas production. The product of the
difference between these two emissions factors and actual measured gas
production gives the number of CERs. Other standardized measures for the
baseline could include emissions from pipeline systems (tCO
2
/kilometer [km])
and compressor stations (tCO
2
/megawatt [MW]), as well as emissions from LNG
processing (tCO
2
/MCM of gas processed) within the designated monitoring
period.
35
The gross carbon emissions for a given AG production site and the investment
required are known with relatively high certainty. The emission projections are
based on the forecasted oil production, the gas-to-oil ratio, and the flaring
efficiency. The first two factors are based on historic production (or well tests)
and the reservoir models, while the last factor is based on gas composition and
estimated efficiency.
Other key parameters include fractional composition of AG before combustion
(for example, proportion of methane [CH
4
], CO
2
,
and other hydrocarbons,
accurately quantified and usually expressed as a percentage).
5.2
Data Sources and Availability
Section 5 of the proposed new format covers the data sources and assumptions
that should be used in the baseline methodology.
For baseline emissions, data availability and standards used are particularly
important issues for green field projects, since brown field projects normally will
have existing data. The baseline scenario will need to forecast the emissions at
35
For more examples, see Table 13 in the IEA report
Emission Reduction in the Natural Gas Sector through
Project-Based Mechanisms,
2003, at: http://www.iea.org/dbtw-wpd/textbase/papers/2003/devbase.pdf
Page 46
36
various stages of the gas chain, based on relevant comparisons in the region or
internationally. As discussed in section 2.4 of this document, fugitive emissions
can occur at each stage along the gas value chain, because of leaks, venting during
maintenance, and the use of gas in pneumatic devices. National regulations may
specify what levels of fugitive gas are acceptable, in which case these will be
useful for constructing the baseline. If national regulations do not exist, then
regional or international standards can be used (see examples in the International
Energy Agency [IEA] report
Emission Reduction in the Natural Gas Sector
through Project-Based Mechanisms
).
After projects are implemented, the monitoring plan will include quantification of
fugitive emissions and compressor/on-site energy use. The project developer
should conservatively estimate these factors/standards using established factors
and practices (for examples, compressor energy use). It is important to remember
that, in most cases, gas is monitored along the value chain, so limited additional
project monitoring is required for a CDM project. The project and baseline
emissions factors will be used to calculate the avoided GHGs.
5.3 Uncertainties
Section 6 of the proposed new format addresses uncertainties in the baseline
methodology. The uncertainties for GFR projects relate both to the assessment of
additionality (for example, the accuracy of the barrier assessment or economic
analysis of alternatives) and to the main parameters and assumptions outlined
above. These assumptions include quantity of AG; fractional composition of the
gas, which is directly measurable using commercially available metering
equipment; and the emissions from energy consumption for compressors and
processing facilities. The uncertainties are managed insofar as emissions
reductions are accrued only for actual gas recovered and used (for example, gas
delivered to the power plant).
5.4
Transparency and Conservatism
Section 7 of the proposed new format must show how the baseline methodology
was developed in a transparent and conservative manner. The transparency
requirement is best met by ensuring that the methodology is logical; fully
documented; and, to the degree possible, developed using established factors,
algorithms, and protocols. Where possible, approved methodologies (either in
whole or in part) should be used to construct the new methodology proposal. The
methodology should also require the project developer to clearly cite all reference
documents, such as oil field development plans or protocols.
The issue of conservatism is crucial both in the calculation of baseline GHG
emissions and the justification of the additionality of the project. Concerning
emissions, the implication is that all of the relevant emissions impacts (positive
and negative) should be fully incorporated and, when an uncertainty exists in the
factors used for calculating emissions, the one providing the lowest emissions
reductions must be used. In the Rang Dong example, a measure of conservatism
Page 47
37
was the assumption that all CH
4
would be converted to CO
2
, thus having the
impact of lowering the baseline emission scenario.
36
Concerning the assessment of economic attractiveness, fuel prices and other
variables should be consistent with the firm�s policy, because these are important
for the project�s economic attractiveness. Any risk premium incorporated into the
economic analysis, or anywhere else within the evaluation, should be clearly
identified, quantified, and justified.
When applying an approved methodology to a specific project, the project
developer should bear in mind that assumptions, statements, algorithms, or data
will be subject to validation by an independent third party.
5.5 Monitoring
Processes
While the focus on this report is on baseline methodologies for GFR projects, the
EB has stated that monitoring methodologies should accompany new baseline
methodologies, because both are used in combination to calculate emissions
reductions. The format for a new monitoring methodology is included in Annex 4
of the PDD. The main areas covered are as follows:
�
A brief description of new methodology.
�
Data to be collected or used to monitor emissions from the project
activity, and how these data will be archived.
�
Potential sources of emissions, which are significant and reasonably
attributable to the project activity, but which are not included in the
project boundary, and identification of whether and how data will
be collected and archived on these emission sources.
�
Assumptions used in elaborating the new methodology.
�
Quality control (QC) and quality assurance (QA) procedures are being
undertaken for the items monitored.
�
The potential strengths and weaknesses of this methodology.
�
Whether the methodology has been applied successfully elsewhere and,
if so, in which circumstances.
Sections 2, 3, and 4 have tables to indicate data to be monitored, how it will be
collected and archived, and what QC procedures will be applied to each process.
As for baseline methodologies, it is useful to break up a project into modules each
of which could have their own baseline and monitoring methodology (see section
2.4 of this document). For the upstream elements, the key data to be monitored
would be as follows: AG captured, gas composition, flaring efficiency (if there is
any emergency flaring in the project case), fugitive emissions on site and during
processing, and gas consumption for energy use on site.
37
Gas use for energy in
compressors and processing can be calculated indirectly from the difference in
gas production and gas export from the processing site. The monitoring protocol
should specify where along the gas chain the flow of gas would be measured, and
36
The methodology recognizes that some gas would be uncombusted, that is, up to 2 percent released into the
atmosphere, but argues that, because of difficulties in measuring this, it should be assumed that all methane
would be flared in the interest of conservatism.
37
For the Rang Dong project, the project proponents argued that fugitive emissions on site and during
processing would be negligible because of safety concerns and local regulations.
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38
the data should then be used to estimate gas utilized for energy in production and
processing.
For pipeline transport, monitoring will occur in any case to ensure the safety and
integrity of the pipeline network.
This monitoring plan should be referenced in the PDD.
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39
Annex 1 CDM Primer
A.1.1 The CDM after Marrakech
The clean development mechanism (CDM) is one of three market-based
mechanisms established in the Kyoto Protocol to assist Annex I
38
countries in
meeting greenhouse gas (GHG) emissions reduction and limitation targets.
39
It
enables project developers and investors to earn credits (certified emission
reductions [CERs]), which can be used against domestic emission reduction
targets
40
(now or in a defined future period), or sold on the various carbon
markets that are currently evolving.
The CDM became operational following the conclusion of the seventh session of
the Conference of the Parties to the United Nations Framework Convention on
Climate Change (UNFCCC) Conference of the Parties (COP-7). It was at COP-7
that the majority of the rules and procedures for the CDM were adopted as
expressed in Decision 16/CP.7 of the Marrakech Accords. For simplicity and
clarity, in
this report, the term �CDM rules� will encompass the CDM modalities
and procedures
41
and any guidance issued by the CDM Executive Board (EB) and
the COP.
The EB held its first meeting following COP-7. Since then, the board has held
twelve meetings, issued guidance on various issues, and established advisory
panels to assist it in accomplishing its goals. Three panels have been established:
(a) the small-scale panel, responsible for developing modalities and procedures
for small CDM projects;
42
(b) the accreditation panel, responsible for setting up
the accreditation system and for accrediting entities as validators and verifiers (the
first step in becoming a designated operational entity [DOE]); and (c) the baseline
and monitoring methodology panel (often referred to as the Meth. Panel),
responsible for providing guidance to the EB on baseline and monitoring
methodologies, among other issues.
A.1.2 The CDM Project Cycle
The main steps of the CDM project cycle are as follows (see Figure A.1.1):
38
Annex I countries are defined as countries that have signed the Kyoto Protocol. A list of these countries
can be found at: http://unfccc.int/resource/conv/ratlist.pdf.
39
For a more thorough introduction of the CDM, please see GGFR report on Kyoto Mechanisms for Flaring
Reduction available at http://www.worldbank.org/ogmc/ggfr.
For detailed information, the reader is referred
to the UNFCCC CDM website at
http://cdm.unfccc.int/
40
Validity of CERs within a domestic emissions
trading schemes (ETS) will be dependent on the scheme�s
design. For instance, the European Union (EU) will allow CERs into its ETS, but may impose limits. Clearly,
the value of a CER is likely to be higher if it can be used in a domestic or regional ETS than if the CERs
cannot enter into any established systems.
41
In many reports, the term Marrakech Accords is used to refer to the CDM modalities and procedures.
Strictly speaking, the Marrakech Accords, however, encompasses 24 Decisions taken by the COP covering a
range of issues, many of which have no relation to the CDM.
42
The three main project types are (a) projects that do not exceed 15 megawatts (MW) of nominal capacity,
(b) EE [Energy Efficiency ]projects that do not save more than 15 GWh per year, and projects that do not
directly emit more than 15,000 tCO
2
e annually.
Page 50
40
�
Project identification and design
: The project owner/project developer
identifies an opportunity, conducts a prefeasibility study, and
develops an official Project Design Document (PDD).
�
Host country approval
: The designated national authority (DNA) of the
host country ap
proves the project, based on the country�s
evaluation criteria and assessment of the project�s contribution to
sustainable development.
�
Third-party validation of project design and baseline
: The PDD is
validated by a DOE that serves as an independent third-party
auditor.
�
Registration
: Once a project is validated and approved by the host
country, it is registered by the EB.
�
Financing and implementation:
The project is financed and implemented
like a normal investment project.
�
Monitoring
: Project performance, including baseline conditions, is
measured by the project developer in the commissioning process
and throughout the crediting lifetime of the project, to calculate the
actual emissions reductions.
�
Verification of project performance
: The DOE verifies project
performance, against the validated design and baseline, to certify
the credits.
�
Issuance
: Based on the successful performance of these steps, the CERs
are issued by the EB.
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41
Figure A.1.1
Steps in the CDM Project Cycle
P
roject design document
Host country approval
Designated
national authority
Operational entities
Project owner
Executive Board
Validation
Registration
Financing & implementation
Monitoring
Verification & certification
Issue CERs
Selecting a baseline methodology relates to the first step of the CDM project
cycle. Activities in this step include (a) designing the CDM project (or, if it is a
subset of a larger project, defining the CDM portion of the project), (b) reviewing
host country regulations, (c) developing a baseline scenario and monitoring plan,
and (d) soliciting stakeholder comments.
Page 52
Page 53
43
Annex 2 Baseline Methodology Approval Process
Initially, the CDM Executive Board (EB) has chosen to take a bottom-up
approach to baseline methodology development, where individual project
developers are responsible for proposing new methodologies, if no appropriate
methodology exists for their type of project. This is opposed to a �top-down�
approach in which the EB specifies a list of methodologies, and their content, in
advance. In practice, this has meant that all of the early CDM proposals to the EB
included a proposed new methodology. Still, the large and growing CDM baseline
literature on �top-down� studies greatly influences the actual development of
baseline methodologies.
If an appropriate approved methodology does not exist for a specific project type,
then project developers must develop one and apply it to the development of a
baseline scenario for the project. The CDM rules require that, at a minimum, a
draft Project Design Document (PDD) be submitted to the EB for approval of a
new methodology. A draft PDD differs from a complete PDD in that an
environmental assessment, stakeholder comments, and host country approval are
not required. In the first rounds of methodology approval, however, project
developers have generally submitted full or almost complete PDDs.
The EB agreed on a process for reviewing and approving new methodologies,
which is shown in Figure A.2.1. The EB has chosen to take a conservative and
deliberate approach in approving methodologies. During the first round of
reviews, no methodologies were initially approved; however, two of the
methodologies were subsequently resubmitted and approved. From this process,
the EB provided information that clarifies the distinction between a baseline
methodology and a baseline scenario for a project. The EB also provided
additional guidance in subsequent meetings. The approved methodologies provide
a framework for developing new methodologies.
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44
Figure A.2.1
Steps in the Process of Methodology Approval
As of end March 2004, the EB had approved 11 methodologies, of which 1
addressed gas flaring reduction projects (see Annex 5 and 6 for more detail).
Because additionality is mentioned in both the baseline methodology (Annex 3 of
the PDD) and in the PDD itself, some early confusion existed regarding whether
the EB and Meth. Panel have the responsibility to ensure additionality by
approving sound methodologies, or whether the designated operational entity
(DOE) has primary responsibility during validation to determine whether the PDD
has adequately justified additionality. While it is clear that DOE will validate
whether the project is additional, to date, the rulings of the EB show how
important the issue of additionality is in the methodology development itself.
In the negotiations on the CDM rules, parties proposed several different kinds of
tests for additionality. These included whether the project:
�
Had an economic return that was below an investor�s hurdle rate without
carbon revenues (�investment additionality� or �financial
additionality�)
�
Used technology that was significantly better than average
(�technological additionality�)
�
Would not have happened without the CDM (sometimes called �program
additionality�)
The final agreement was to conduct a test of whether GHG emissions were
reduced by the project. The rationale for using only an emissions reduction test
was that it is more quantifiable and less susceptible to gaming than the other tests.
This was confusing, however, because whether emissions are reduced by the
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45
project depends on the baseline, so the two concepts are difficult to separate.
Practically, however, project developers still need some tools to justify why
emissions are reduced by the project. The fact that the PDD requires developers to
explain why the project is not in the baseline implicitly means that developers
must justify why the project would not have occurred without CDM intervention.
Therefore, in practice, almost all of the approved methodologies include financial
tests, barriers analysis, or other decision tools to show why the project would not
have occurred in the baseline scenario.
Page 56
Page 57
47
Annex 3 GFR and the CDM
A.3.1 Key Features of GFR Projects
Associated gas (AG)
43
is a blend of various hydrocarbons that are released when
crude oil is brought to the surface. The composition and amount of such gases
varies from one field to another. AG combusted or released as uncombusted gas
produce the primary greenhouse gases (GHG), carbon dioxide (CO
2
), and
methane (CH
4
).
44
The ratio of combusted to uncombusted gas is crucial because
the impact of CH
4
on global warming is greater than that of CO
2
. Therefore, a
small change in the ratio of flaring to venting has a disproportionate change in the
impact on the global environment.
A flare reduction project typically reduces GHG emissions by one or more of the
following development options for AG that is currently or expected to be flared:
�
Capture and reinjecting the gas into the oil reservoir,
�
Capture and delivery through a pipeline to an end user, and
�
Capture and process the gas into liquids (that is, liquefied natural gas
[LNG], gas-to-liquids [GTL], or liquefied petroleum gas [LPG])
that can be transported and sold locally or internationally.
In general, choosing the appropriate option(s) depends on upstream conditions,
such as field characteristics and the oil-to-gas ratio, downstream market
opportunities for the recovered gas, and the legal and fiscal frameworks that may
include various incentives and penalties. Understanding and documenting how
these factors influence decisions made by the petroleum industry are critical for
the CDM to become an effective instrument that supports the objectives of the
Kyoto Protocol and the UNFCCC.
A.3.2 The Gas Value Chain
Disaggregation of the gas value chain for the purposes of baseline methodology
development is useful and appropriate, because it reflects industry practice (that
is, a closed chain of activities involving distinct processes, often under the control
of different actors and stakeholders) and the nature of emission reductions in each
stage are materially different. This annex and the next describe each step of the
gas chain, and the emissions that occur in each stage.
45
Because the focus is on
AG from oil production, issues that relate only to dedicated natural gas production
are not discussed.
Extraction/production:
Oil reserves are identified through a combination of
seismic analysis and remote sensing technology, after which exploratory wells are
43
Sometimes called solution gas.
44
Flaring and venting of AG also give rise to relatively small quantities of nitrous oxide (N
2
O) emissions,
also listed as a GHG and covered by the emission targets of the Kyoto Protocol.
45
This section of the annex is adapted from �Developing Baselines for Natural Gas Projects� published by
the IEA (
www.iea.org
). An additional source of information on the identification and evaluation of GHG
emissions and the reporting of these is the Petroleum Industry Guidelines for Reporting GHG Emissions
available at
http://www.ipieca.org/working_groups/climate_change/cc_home.html
Page 58
48
drilled to evaluate the quality and quantity of reserves. Even where the wells are
drilled primarily for oil production, the AG exits the well under high pressure. In
the past, because the focus was solely on crude oil extraction, the natural AG from
these wells was often flared or vented into the atmosphere.
Processing:
While gas from some fields meets the quality conditions necessary
for transport through a pipeline, generally AG must be processed before it can be
used. Gas processing removes the water and any acidic substances such as
hydrogen sulfide (H
2
S) and/or CO
2
. In addition, if heavier hydrocarbons are
present in the gas (such as ethane, propane, butane, and/or pentane), they must be
processed before transporting the dry gas by pipeline. These heavier hydrocarbons
are referred to as natural gas liquids once they are removed from the gas stream.
Pipeline transmission:
After processing, gas may be used on site (for example,
for power generation), reinjected, transported to market via a pipeline, or liquefied
and transported in a tanker by sea. The decision on transmission mode is based on
the economics of transport, because pipelines require a large capital investment to
cover significant distances. Pipeline systems include compressor stations to
efficiently move gas through the pipelines, as well as period valves used to close
off sections for maintenance and repairs. Depending on the distance from the
market, the cost of pipeline infrastructure can often be a major barrier to
marketing gas.
LNG:
For long distances, gas can be liquefied, put into tankers, and then
vaporized at the destination port. LNG liquefaction, transport, and regasification
are separate procedures logistically and geographically, often operated by separate
companies. The process requires a large investment in port facilities, and, thus, is
done only when large quantities of gas are involved. A number of different
processes can be used to vaporize the gas at the destination before it is charged
into a pipeline network.
Storage:
Storage facilities are used at many stages of the gas chain to balance
supply and demand in the gas market. Facilities include geologic storage in
aquifers, depleted oil fields, and salt caverns, as well as dedicated LNG storage
facilities.
Distribution:
Local gas distribution companies take the gas from pipelines,
reduce the pressure, add an odorant, and move the gas into a smaller diameter
pipeline system for local end users.
End-use consumption:
Gas is a versatile fuel that can be used for power
generation, industrial boilers and process heat, commercial and residential
heating, cooling, and cooking, and even as a transport fuel. Other end-use
applications are gas as feedstock in the chemical industry and GTL processes.
Figure A.3.1 provides an overview of the facilities and processes to take produced
gas to market.
Page 59
49
Figure A.3.1
Overview of Upstream and Midstream Gas Industry
Source
: International Energy Agency. 2003. �Developing Baselines for Natural Gas Projects.�
A.3.3 GHG Emissions along the Gas Value Chain
There are basically three categories of GHG emissions along the gas value chain:
vented gas, fugitive emissions, and emissions from combustion for energy use.
These emissions are summarized in Table A.3.1. Venting occurs when AG from
the oil wells is released directly into the atmosphere as CH
4
. Given that CH
4
is
more potent as a GHG than carbon CO
2
, even a small amount of venting has a
major impact on climate change. Even if the AG is routinely flared, not all will be
combusted and converted to CO
2
: a fraction will be vented. International studies
suggest that best-practice efficiency of combustion is 98 percent, which means
that 2 percent of the gas would be released as CH
4
. It should, however, be noted
Page 60
50
that actual flare efficiency can vary substantially, depending largely on gas
composition and wind speeds.
46
Fugitive emissions refer to unintentional emissions from leaky valves, loose dry
seals in compressors, flanges, and/or intentional venting away from the
production site. Gas is normally vented to prevent a dangerous build up of
pressure in the system, or to release gas to undertake maintenance on a section of
the system. Gas is often emitted during the decompression of equipment, before
maintenance, to help ensure a safe working environment during repair activities.
Typically, operators will block the smallest segment of pipeline needed to make
the repair and vent the contained CH
4
into the atmosphere. An alternative to this
direct CH
4
release is to capture, recompress, and reinject the gas back into the
system. In addition, pneumatic devices are often powered by pressurized natural
gas and are used as liquid level and valve controllers, as well as pressure and
temperature regulators. Gas-
powered devices such as this �bleed�
CH
4
emissions.
Fugitive emissions also occur during loading and unloading of LNG into ships.
The equipment that drives the gas production, processing, and transport system is
generally powered by a portion of the gas produced, so the operation of this
equipment leads to CO
2
emissions. Onsite equipment for extraction, compressors,
and processing facilities all burn gas for energy. In the production of LNG,
liquefaction requires significant amounts of energy as well.
The focus of this report is on mitigation projects whose primary aim is to
eliminate or reduce flaring and venting of associated gas. These projects will
reduce emissions at the production site, but they could actually increase emissions
in processing, transport, and distribution if these facilities are not present in the
baseline. At a site where all AG is flared and there is no equipment for
processing, there cannot be any fugitive emissions from processing. Of course,
projects that collect, process, and market the gas will result in downstream
emission reductions as well. The net carbon reductions are estimated (or
measured), thus, the carbon emission from gas that is marketed instead of flared
will be the sum of carbon reductions at the wellhead minus any losses along the
chain, plus the reductions from end-use fuel switching. It is important to quantify
the net carbon emission changes from production to burner tip.
The mitigation options for each stage of the gas chain are summarized in Table
A.3.1.
46
See The Flare Research project at the University of Alberta at
http://www.mece.ualberta.ca/groups/combustion/flare/index.html
.
Page 61
51
Table A.3.1
Summary of Emissions Sources and Emissions Reductions
Opportunities at Each Stage of the Gas Chain
Stage of the Gas Chain
Nature of Emissions
Opportunities for Emission
Reductions
Natural gas extraction
and production
Venting and flaring of
associated gas
Emissions from on-site energy
use
Fugitive CH
4
emissions from
production facilities and
gathering lines
Reinjection of associated gas
Improve energy efficiency of
operations; convert from higher to
lower carbon fuels (for example, oil to
gas).
Eliminate venting or enhance flaring
efficiency (increase proportion of
methane converted to CO
2
)
Capture of AG and use on site or
downstream
Processing
Fugitive CH
4
emissions from
the following:
�
Treating gas to
remove liquids and other
gases
�
Compressor use in
pipelines and LNG
liquefaction and
regasification
�
Maintenance
Energy use emissions from
processing plant, including
liquefaction
During maintenance, capture,
recompress, and reinject the gas into the
system
Enhance energy efficiency in
compressors to reduce fuel consumption
(for example, replacement of
compressors, or components such as
wet seals with dry seals and compressor
rod and ring replacement)
Waste heat recovery and use of high-
efficiency turbines
Transmission and
storage
Fugitive CH
4
losses from the
following:
�
Compressor use in
pipeline transportation
�
Leaks in pipelines
�
Tanker loading and
unloading
�
Gas not recaptured in
LNG boil off
�
Maintenance
Energy use emissions in
transport
Reduce fugitive emissions by replacing
compressor components, installing
vapor locks on tanker loading, and
capturing and reinjecting gas during
maintenance
Enhancing energy efficiency in
compressors to reduce fuel consumption
(see above)
Distribution
Fugitive emissions from
pipelines, meters, pneumatic
devices, and maintenance
Replacement of gas-fired pneumatic
devices with compressed air systems or
other �low-bleed devices�
Consumption
Energy use emissions from
power sector, commercial and
industrial, or domestic use
Fuel switching to less carbon-intensive
fuels
Domestic uses displace unsustainably
forested (traditional) biomass
Page 62
Page 63
53
Annex 4 Methodology Modules
A.4.1 Power Sector Module
A.4.1.1
Introduction
This is an example of a module that can be used for a power sector downstream
component of a gas flaring reduction (GFR) project activity. The approved
methodology
47
is composed of two parts:
�
Proving additionality through demonstrating the use of prohibitive
barriers to investment and demonstrating that the proposed project
activity is not common practice in the relevant circumstances
�
Describing the baseline scenario through an ex ante value for the
emissions based on a weighted average of the operating and build
margin of the electricity sector
��the monitoring plan then allows
for the ex post measurement of the emissions rate.
The methodology is applicable when the following occurs:
�
There is sufficient publicly available information on the nature of the
barriers and the common practice in the sector,
�
The project supplies a grid whose geographic and system boundaries are
well known and information is available on its characteristics,
�
The grid is not dominated by zero- or low-cost generating sources
(hydro, geothermal, wind, solar, nuclear, and low-cost biomass).
A.4.1.2
Background to the Methodology
When considering the emission reductions gained from downstream activities,
such as consumption of gas by power stations, a standardized baseline approach
may be required for the electric power sector, taking into account regional,
national, or subnational circumstances. Simply expressed, these are benchmarks
in the form of emissions rate per unit of activity kilograms carbon dioxide per
kilowatt hour (kg CO
2
/kWh).
This module is based on recommendations for baseline methodologies developed
by the Organization for Economic Cooperation and Development
(OECD)/International Energy Agency (IEA).
48
These are based on a model of the
energy sector as a whole in that country and an understanding of the project
activity within that generating mix. An electric power grid usually has different
types of power plants that are operated simultaneously, including thermal plants
(coal, gas, and oil), hydroelectric, nuclear, renewables, and so on. Some are
operated as baseload power plants at a high capacity factor, and others as
intermediate and peaking plants, depending on economics and availability. Thus,
47
Based on the El Gallo methodology,
Barrier analysis, baseline scenario development, and baseline
emission rate calculation for a proposed grid-connected project that displaces power from the operation and
expansion of the electric sector
, available at
http://cdm.unfccc.int/methodologies
48
See
Practical Baseline Recommendations for Greenhouse Gas Mitigation Projects in the Electric Power
Sector
, 2002. OECD and IEA Information Paper, International Energy Agency, Paris.
Page 64
54
establishing a baseline for a greenhouse gas (GHG) reducing electricity project
requires determining how that project affects the operation or future construction
of other plants on an interconnected grid.
Simple models include calculating average emission rates, which uses an overly
simplistic assumption that the project activity displaces a proportion of all plants
on the grid. Others exclude nuclear, hydro, or other renewable plants, because of
their low operating costs or because it is not possible to shift the hours of
generation. Another approach is to use marginal plant only, that is, assuming that
those running at highest cost will be displaced first. It requires modeling of the
generation of each plant for each hour in a year to determine what is being
displaced and, hence, an hourly emissions rate. This approach, while most
accurate, is subject to a lack of sufficient data in many developing country
contexts.
A.4.1.3
Step 1: Proving Additionality
The methodology adopts a two-stage process for demonstrating additionality:
barrier analysis and assessment of common practice as described in Table A.4.1.
Table A.4.1
Proving Additionality
Analyze barriers to
proposed project
�
Identify relevant (prohibitive) barriers to
investment and provide documented evidence
�
Explain how the approval and registration of
the project as a clean development mechanism
(CDM) project would enable these barriers to
be overcome, for example, by providing the
following:
�
Financial benefit through carbon revenue
�
Credibility benefits of having an
international partner who purchases the
emissions reduction and has undertaken
due diligence
Analysis of other
activities
Undertake a comprehensive analysis of activities
similar
49
to the proposed project to demonstrate that
the project does not constitute common practice
A.4.1.4
Step 2: Defining the Baseline Scenario and Calculating the
Baseline Emission Rate
The OECD/IEA recommends a combined margin methodology for most grid-
connected projects, where the counterfactual scenario is the ongoing expansion
and operation of the overall grid. This approach reflects the fact that grid projects
49
Activities are considered similar if they are in the same country or region, using similar technologies, of
similar scale, and operating in comparable environments with respect to regulatory framework, investment
climate, access to technology, access to financing, and so on.
Page 65
55
are likely to both affect the operation of current or future plants as well as the
building of new facilities. The approach is a weighted average of the emissions in
tonnes of carbon dioxide per gigawatt hour (CO
2
/GWh) of the following:
�
Operating margin (assuming that the project activity affects the operation
of existing and new plants on the grid in the short term)
�
Build margin (assuming that the project activity will delay or replace the
implementation of a new plant in the long term).
Operating margin reflects the proje
ct�s impact on the operation of the existing
plant. This requires detailed information about the last plants to be dispatched to
meet demand at any time, including historic dispatch data, the hourly cost of
different plants, and so on. Because much of this information is difficult to obtain
in the developing country context,
50
a proxy is used. The proxy is a weighted
average of all plants in operation on the grid, excluding �must run� plants and
those that have zero-cost fuels (hydro, geothermal, wind, low-cost biomass, for
example, sugar cane bagasse and paper and pulp residues). In situations where
hydro is a major component of the generating mix, an adjustment is required.
The build margin attempts to predict the type of generating facility that would
have been built in the absence of the CDM project. Even if the project does not
displace new plant additions, it is likely to delay them, affecting all new
prospective capacity. The methodology should reflect all plant types being added
to the grid system, based on the recent and ongoing power plant construction
activity. The IEA recommends a build margin baseline emission rate based on the
generation-weighted average emissions of the most recent 20 percent of power
plants or the last five plants commissioned, whichever is smaller capacity. These
should be representative of the sector�s development.
The methodology uses the combined margin emissions rate, which is the simple
average of the operating margin and build margin rates, expressed in tonnes
CO
2
/GWh.
A.4.1.5
Key Issues
Importance of the Monitoring Methodology.
The baseline should be considered in
parallel with the monitoring methodology, which provides for the following
elements:
�
Measuring generation from the project activity
�
Determining on an ex post basis (that is, observable operation) the
electricity sector generation and fuel consumption and plants
recently commissioned to allow ex post recalculation of the
baseline emissions rate
�
An ongoing check on the additionality of the project based on an
assessment of the common practice indicator
Availability of Data.
In all cases, the availability of key information sources is a
constraint, and collaboration with local sources is identified as an important
50
For their application to the developing country context in Chile, South Africa, and Brazil, see
Road Testing
Baselines for Greenhouse Gas Mitigation Projects in the Electric Power Sector
, 2002. OECD and IEA
Information Paper, International Energy Agency, Paris.
Page 66
56
conclusion of the original IEA work. The approach offers a consistent and
transparent calculation, which is readily verifiable, and offers an opportunity for a
standardized baseline for use by other project proponents.
Only for Grid-Connected Projects.
For off-grid projects, different methodologies
are proposed, and are generally simpler because off-grid electricity is typically
generated using a single power source such as a diesel generator. In this case, a
project-specific analysis should be undertaken.
A.4.2 Fuel Switching Module
A.4.2.1
Introduction
This is an example of a module that can be used for a downstream component of a
GFR project activity. The approved methodology
51
is composed of the following:
�
Proving additionality through demonstrating that the fuel switching
option (the project activity) is less economically attractive than the
status quo, and
�
Describing the baseline scenario in terms of a simple algorithm of actual
fossil fuel consumption and relevant emission factors.
The methodology is applicable when the following occurs:
�
There is an industrial fuel switching component from coal and petroleum
fuels to natural gas.
A.4.2.2
Proving Additionality
Project additionality is proven by demonstrating that fuel switching is less
financially attractive than the baseline scenario (the status quo of using higher
carbon intensive fuels). This is proven by investment analysis using the
computation of net present value (NPV) for the baseline and project activity using
historic and projected fuel consumption and cost data.
A.4.2.3
Defining the Baseline Scenario and Calculating the Baseline
Emission Rate
The baseline emissions are based on actual or historic emissions of carbon dioxide
(CO
2
)
and methane (CH
4
)
through the combustion of coal and petroleum fuels
(diesel and liquefied petroleum gas [LPG]) using standard emission factors (for
example, kgCO
2
per gigajoule [GJ] of lower heating value basis, kilograms
methane (kgCH
4
) per ton of coal used) and projected fuel consumption based on
plant output.
51
Based on the methodology associated with the Graneros Plant Fuel Switching Project,
Baseline
Methodology for Industrial Fuel Switching from Coal and Petroleum Fuels to Natural Gas (NM0016)
available at
http://cdm.unfccc.int/methodologies
Page 67
57
The emission reductions are simply those of the baseline (status quo) less those of
the project activity (the fuel switch). These are computed using the monitoring
and verification protocol, using the following key parameters:
�
Quantities of fossil fuels used
�
Quantity of natural gas
�
Estimates of fugitive CH
4
emissions from pipelines
�
Production at the plant
�
Emission factors (specified by the Intergovernmental Panel on Climate
Change [IPCC])
�
Lower heating values (measured, LHV used for conservatism)
Page 68
Page 69
59
Annex 5 Rang Dong Case Study
This overview draws on the submission of the Rang Dong Oil Field Associated
Gas Recovery and Utilization Project, submitted to the Clean Development
Mechanism (CDM) Executive Board (EB) in September 2003, and subsequent
public documents released by the EB.
52
It is the first gas flaring project
methodology to be submitted to the United Nations Framework Convention on
Climate Change (UNFCCC). It was approved by the EB at the thirteenth meeting
in March 2004, but it will still be edited before being published. Once available, it
can be used by any project that meet the conditions for its use.
A.5.1 Applicability of the Rang Dong Case
Many aspects of the methodology are relevant and transferable to other gas flaring
reduction (GFR) projects, and the process of approval, including comments made
by expert reviewers, provides important information for subsequent
methodologies to be developed. However, it appears unlikely that many project
developers will be able to apply this methodology directly. The methodology is
closely related to the accompanying project and it includes project-specific
information, which is not to be recommended. No project-specific information or
even references to the project should be included.
The methodology applied for the Rang Dong project has several features that
restrict its applicability, even for projects similar to the Rang Dong flaring
reduction:
�
The additionality assessment put nearly all weight on the economic and
financial analysis by comparing the projects internal rate of return
(IRR) against a hurdle rate. The methodology states the level of the
hurdle rate and the actual hurdle rate (as well as the IRR of the
project). Clearly, this hurdle rate (set by the Japan Vietnam
Petroleum Company Ltd. [JVPC] for overseas investments) is not
generally applicable. Moreover, as argued in section 3 of this
report, economic and financial analysis is often not appropriate as
the only tool of additionality assessments (let alone using IRR as
the sole variable of economic and financial analysis).
�
The methodology does not account for venting elimination, for the sake
of conservatism. Instead any vented gas (in the baseline) is
accounted for as carbon dioxide (CO
2
). It seems likely that project
proponents of future GFR projects would seek credits for
elimination of uncombusted gas, given the fact that flare efficiency
never can be 100 percent.
�
The methodology does not include downstream use of the gas as part of
the project boundary, even if gas from Rang Dong replaces other
fuel use downstream. In many similar cases, it is likely that project
52
The full PDD and the Annexes are available at www.cdm.unfccc.int as NM0026 Oil Field Associated Gas
Utilization Baseline Methodology, along
with expert reviewer�s reports and the Preliminary
Recommendation by the Methodology Panel.
Page 70
60
proponents will include these emissions in the project boundaries
and seek credits for any possible emission reductions.
In the overview below, key aspects with the methodology are presented. It follows
the current format of the Project Design Document (PDD) Annex 3 Baseline
Methodology as indicated by the headlines below. The relationship between the
sections of this format (Annex 3) and the format of the new baseline
methodologies (PDD-NMB), are referred to in the sections below.
A.5.2 Project Background
The project participants are JVPC, Vietnam Oil and Gas Corporation
(PetroVietnam, state owned), PetroVietnam E&P Company, and Conoco Phillips
Gama Ltd (UK). The field is located 140 kilometers off the southeast coast of
Vietnam. The project activity is defined in the PDD as the recovery and utilization
of associated gas (AG), which otherwise would be flared.
The project activity involves the retrofitting of installation of gas compression
facilities (9 MW) to recover and transport AG, and the construction of a 46 km
pipeline to the neighboring field for onward transmission to an onshore gas
processing plant. The AG will then be processed to dry gas, liquefied petroleum
gas (LPG), and condensate to be used for power supply, home cooking fuel, and
octane enhancer of gasoline, respectively.
The project is stated to have commenced in December 2001 (when the pipeline
went into operation).
The baseline of the project is considered to be flaring and in-house combustion of
the AG. The greenhouse gas (GHG) emission reductions are achieved by using
the oil field gas, compressing it, and processing it to LPG, condensates, and dry
gas. These gas products replace the same or other fossil fuels sources with
identical or higher carbon intensity. The methodology only takes into account
emissions reductions at the production site, not at the end-use site. The project
generates 6.7 million tCO
2
e over the fixed crediting period of 10 years.
A.5.3 Methodology
A.5.3.1
Section 1. Title of Proposed Methodology
Oil field AG utilization baseline methodology.
The project type is of the second category discussed in the text of this report (that
is, report, capture, and transport for downstream use).
The project is located at an existing installation (that is, a brown field site).
53
A.5.3.2
Section 2. Description of the Methodology
The Rang Dong project methodology proposes the use of the approach in
paragraph 48 (b) of the CDM modalities and procedures (that is, GHG emissions
53
The expert reviewers suggest the methodology is transferable to other gas use projects if the current
practice is flaring or in-house combustion of oil field gas.
Page 71
61
from technologies representing an economically attractive course of action, taking
into account barriers to investment).
This is based on an investment analysis methodology after evaluating legal,
technical, and economic barriers to investment. The expert reviewers and the
Baseline and Monitoring Methodology Panel (Meth. Panel) agreed this to be an
appropriate approach.
The overall approach to selecting the baseline scenario is that of the standard
investment analysis. This identifies all plausible project alternatives including
�business-as-usual� activity, the proposed project activity itself, and all other
options that satisfy the relevant legal, regulatory, and environmental
requirements��including host country priorities. The methodology then ranks all
the alternatives or scenarios according to their risk-adjusted IRR, costs, or net
benefits, or through qualitative arguments. The project alternative with the highest
IRR (or least cost or highest net benefit) is selected as the baseline scenario.
The principal types of development options for AG include the following:
�
Option 1:
Venting, or release to the atmosphere
�
Option 2:
Reinjection into the oil reservoir to enhance oil recovery
�
Option 3:
Recovery, transport, and use
�
Option 4:
Local (on-site) consumption
�
Option 5:
Flaring, that is, conversion to CO
2
In the Rang Dong case:
�
Option 1
is prohibited by law in Vietnam and therefore eliminated.
�
Option 2
is technically feasible
54
but is expensive and less efficient
compared with water injection.
�
Option 3
is judged to be commercially unattractive.
�
Option 4
is currently in use for onsite consumption of power generation,
but the amount used is very small.
�
Option 5
is currently in use.
These latter two options form the current situation, and the natural course of
action would be to continue these and, hence, they are the baseline. It is
demonstrated through the use of the methodology that the project activity is not
the baseline.
A.5.3.3
Section 3. Key Parameters and Assumptions
The calculation includes the following:
�
Volume of AG produced (measured, usually expressed in 1,000 cubic
meters [m
3
]).
�
Fractional composition
55
of AG before flaring (proportion of methane
and CO
2
, accurately measurable and usually expressed as
percentage).
54
In many cases, the reinjection of AG offers significant resource savings and improved project economics,
and would form the business-as-usual (BAU) or baseline scenario in terms of economic attractiveness. The
project proponent would need to clearly justify why this is not the case for the project activity, through the
identification and justification of barriers to investment.
55
The reviewers recommended that the frequency of this be reconsidered in the monitoring methodology.
Page 72
62
�
Carbon content of AG (calculated from the first two, usually expressed
as tones of C per 1,000 m
3
).
A.5.3.4
Section 4. Project Boundary
In this case, the project boundary is drawn around the Rang Dong oil field, that is,
the point of production and shipping. (See Figure A.5.1) The expert reviewers
also recommended including the fugitive emissions from the pipeline and gas
compressor emissions in the boundary (these were previously considered
negligible). Downstream emissions are not included.
56
Figure A.5.1
Description of Rang Dong Project and Project Boundary
Source
: Rang Dong Project Documents, 2004.
The emission reductions are calculated by a simple carbon mass balance approach
using monitoring points located inside and outside the project boundary.
A.5.3.5
Section 5. Assessment of Uncertainties
The uncertainties relate to the main parameters and assumptions outlined above,
namely quantity of AG, fractional composition of the gas (which is directly
measurable using commercially available metering equipment), and the loss of
gas due to internal consumption (for example providing energy for gas
compressor and processing facilities). The uncertainties are managed insofar as
certified emission reduction (CERs) are only accrued for actual gas recovered and
used (that is, delivered to the market).
Projection of AG production is linked to the oil production profile. This is
simulated by computer models of the reservoir. A base case of emissions and a
high case are presented in the documents. The Meth. Panel has recommended a
low case scenario to be presented as well.
56
For a multicomponent project this could include the downstream consumption of the AG produced by
power sectors, industrial consumers, or local, household, and transport sectors. However, the end consumer is
not under the control of the project participants or attributable to the project, and no credit is being sought in
this particular case.
Page 73
63
Finally, a change in the commercial scheme could trigger a large change in end
consumption
��the output then may be used in other applications or, in the worst
case, flared.
A.5.3.6
Section 6. Calculation of Baselines Emissions and
Determination of Project Additionality
While the methodological approach for baseline development was considered
appropriate, further clarification was sought by expert reviewers and the Meth.
Panel on demonstrating additionality. The argument for additionality is based on
economic attractiveness (that is, that the project would not have been
implemented without the CDM revenue).
The assessment of economical attractiveness (and IRR calculation) is complex
and will take into account the following factors:
�
Gas reserves
�
Gas production profile
�
In-house consumption and flaring volume
�
Sales volume
�
Capital expenditure (CAPEX)
�
Operational expenditure (OPEX)
�
Cost recovery principle
�
Gas price escalation
�
Profit sharing ratio
�
Gas specification
Option 3
��recovery, land transport, and use��while desirable environmentally
and from a resource efficiency point of view, is judged to attract an IRR of 8 to 9
percent against a minimum investment criteria of 10 percent.
The proximity of IRR calculated for the project and the minimum investment
criteria (hurdle rate) of the project developer was a cause for some concern for the
reviewers, and additional information on the financial analysis was requested,
including the following:
�
Justification of costs and revenue categories
�
Assumptions about project lifetime
�
Sources of data (for example, gas prices)
�
Justification of the proposed IRR threshold
This information was subsequently supplied, including submission of a
spreadsheet summary.
A.5.3.7
Section 7. Leakage
It is assumed that there are negligible fugitive emissions in the upstream shipping
point of the gas products due to state-of-the-art infrared gas leakage detection
equipment.
Fugitive emissions of methane could occur as gas leaks, and this is addressed
through the use of a United States Environmental Protection Agency (USEPA)
Page 74
64
calculation method for fugitive emissions.
57
The Meth. Panel recommends that
pipeline situations in similar socioeconomic environments are used for
comparison.
An important assumption is that the additional supply of gas products from the oil
field does not lead to lower prices and higher consumption in the market, which
would increase GHG emissions. Market share analysis of the gas products (dry
gas, LPG, and condensates) from the project was compared with demand in the
local market to illustrate that these supply volumes are small compared with the
similar products being displaced
��in this case, imported��and will not affect
prices or increase consumption.
A.5.3.8
Section 8. Criteria Used in Development of the Baseline,
including Conservatism and Transparency
The following measures are proposed:
�
The assumption that all methane would be converted to CO
2
is a measure
of conservatism,
58
that is, having the impact of lowering the
baseline emission profile.
�
The CERs do not take into account the displacement of diesel
consumption at the end consumer plant (which is fired by a
combination of gas and diesel).
�
The additional financial analysis information and supporting information
(for example, the full Oil Field Development Plan reference)
provided by the project developer provides further transparency.
A.5.3.9
Section 9. Assessment of Strengths and Weaknesses
Simplicity of approach and conservatism of assumptions regarding all gases to be
flared are regarded as strengths. Some weaknesses in measurements are overcome
through calculation between gas recovered and delivered.
A.5.3.10
Section 10. Other Considerations
National and sectoral policies are taken into account in the elimination of
projected development options on legal/regulatory, economic, and technical
grounds.
57
Based on work undertaken by the API and referenced in the Preliminary Recommendations of the Meth.
Panel.
58
The methodology recognizes that some venting would occur, that is, up to 2 percent released into the
atmosphere, but argues that because of difficulties in measuring this, it should be assumed that all methane
would be flared in the interest of conservativeness.
Page 75
65
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7
1
Annex 7 Glossary of CDM Terms
Annexes 7 and 8 are provided for reference purposes only and comprise edited
highlights of the guidelines and forms taken from the UNFCC website. Please
refer to the UNFCC
59
website for complete guidance documents.
The following CDM glossary intends to assist in clarifying terms used in the
Project Design Document (CDM-PDD), the Proposed New Methodology:
Baseline (CDM-NMB) and the Proposed New Methodology: Monitoring
(CDM-NMM) and the in the CDM modalities and procedures in order to
facilitate the completion of the CDM-PDD, CDM-NMB and CDM-NMM by
project participants.
Clean development mechanism (CDM):
Article 12 of the Kyoto Protocol defines the clean development mechanism. "The
purpose of the clean development mechanism shall be to assist Parties
60
not
included in Annex I in achieving sustainable development and in contributing to
the ultimate objective of the Convention, and to assist Parties included in Annex
I in achieving compliance with their quantified emission limitation and
reduction commitments under article 3."
At its seventh session, the Conference of the Parties (COP) adopted modalities
and procedures for a clean development mechanism (CDM modalities and
procedures, see annex to decision 17/CP.7, document FCCC/CP/2001/13/Add.2)
and agreed on a prompt start of the CDM by establishing an Executive Board and
agreeing that until the entry into force of the Kyoto Protocol (a) this Board
should act as the Executive Board of the CDM and (b) the Conference of the
Parties (COP) should act as the Conference of the Parties serving as the meeting
of the Parties to the Kyoto Protocol (COP/MOP) as required by the Protocol and
the CDM modalities and procedures.
Terms in alphabetical order:
"Attributable":
See "measurable and attributable". Authorization of a private
and/or public entity to participate in a CDM project activity:
The authorization of a private and/or public entity, to participate in a CDM project
activity referred to in paragraph 33 of the modalities and procedures, is provided
in writing by the DNA of the Party pursuant to the laws of which the private
and/or public entity is constituted as a legal entity.
In the case of a bilateral or multilateral fund wishing to be a project participant,
Party(ies) which is/are directly or indirectly party(ies) to the fund shall provide
the required authorization.
In the case of a private equity fund wishing to be a project participant, the DNA
of the Party in which the entity is a legal entity shall provide the required
authorization.
The authorization referred to in the above three paragraphs:
59
http://cdm.unfccc.int/Reference/Documents/cdm_nmb/English/CDM_NMB.pdf
60
In this glossary, the term "Party" is used as defined in the Kyoto Protocol: "Party" means, unless the
context otherwise indicates, a Party to the Protocol. "Party included in Annex I" means a Party included in
Annex I to the Convention, as may be amended, or a Party which has made a notification under Article 4,
paragraph 2(g), of the Convention.
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72
�
may be included in the written approval referred to in paragraph 40 (a) of
the CDM modalities and procedures.
�
can pertain to a specific project activity or be of a general character.
The DOE shall receive documentation of the authorization.
Baseline:
See baseline scenario.
Baseline approach:
A baseline approach is the basis for a baseline methodology.
The Executive Board agreed that the three approaches identified in sub-
paragraphs 48 (a) to (c) of the CDM modalities and procedures be the only ones
applicable to CDM project activities. They are:
�
Existing actual or historical emissions, as applicable; or
�
Emissions from a technology that represents an economically attractive
course of action, taking into account barriers to investment; or
�
The average emissions of similar project activities undertaken in the
previous five years, in similar social, economic, environmental and
technological circumstances, and whose performance is among the
top 20 per cent of their category.
Baseline methodology:
A methodology is an application of an approach as
defined in paragraph 48 of the CDM modalities and procedures, to an individual
project activity, reflecting aspects such as sector and region. No methodology is
excluded a priori so that project participants have the opportunity to propose a
methodology. In considering paragraph 48, the Executive Board agreed that, in
the two cases below, the following applies:
�
Case of a new methodology: In developing a baseline methodology, the
first step is to identify the most appropriate approach for the
project activity and then an applicable methodology;
�
Case of an approved methodology: In opting for an approved
methodology, project participants have implicitly chosen an
approach.
Baseline
�new methodology:
Project participants may propose a new baseline
methodology established in a transparent and conservative manner. In developing
a new baseline methodology, the first step is to identify the most appropriate
approach for the project activity and then an applicable methodology. Project
participants shall submit a proposal for a new methodology to a designated
operational entity by forwarding a completed "Proposed New Methodology:
Baseline (CDM-NMB)" along with a completed "Proposed New Methodology:
Monitoring (CDM-NMM)" and the Project Design Document (CDM-PDD) with
sections A to E completed in order to demonstrate the application of the proposed
new methodology to a proposed project activity.
The proposed new methodology will be treated as follows: If the designated
operational entity determines that it is a new methodology, it will forward,
without further analysis, the documentation to the Executive Board. The
Executive Board shall expeditiously, if possible at its next meeting but not later
than four months review the proposed methodology. Once approved by the
Executive Board it shall make the approved methodology publicly available along
with any relevant guidance and the designated operational entity may proceed
with the validation of the project activity (applying the approved methodology)
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73
and submit the project design document for registration. In the event that the
COP/MOP requests the revision of an approved methodology, no CDM project
activity may use this methodology. The project participants shall revise the
methodology, as appropriate, taking into consideration any guidance received.
Baseline - approved methodology:
A baseline methodology approved by the
Executive Board is publicly available along with relevant guidance on the
UNFCCC CDM website (http:llunfccc.int/cdm) or through a written request sent
to cdm-info@unfccc.int or Fax: (49-228) 815-1999.
Baseline scenario:
The baseline for a CDM project activity is the scenario that
reasonably represents the anthropogenic emissions by sources of greenhouse
gases (GHG) that would occur in the absence of the proposed project activity. A
baseline shall cover emissions from all gases, sectors and source categories listed
in Annex A (of the Kyoto Protocol) within the project boundary. A baseline shall
be deemed to reasonably represent the anthropogenic emissions by sources that
would occur in the absence of the proposed project activity if it is derived using a
baseline methodology referred to in paragraphs 37 and 38 of the CDM modalities
and procedures.
Different scenarios may be elaborated as potential evolutions of the situation
existing before the proposed CDM project activity. The continuation of a current
activity could be one of them; implementing the proposed project activity may be
another; and many others could be envisaged. Baseline methodologies shall
require a narrative description of all reasonable baseline scenarios.
To elaborate the different scenarios, different elements shall be taken into
consideration, including related guidance issued by the Executive Board. For
instance, the project participants shall take into account national / sectoral policies
and circumstances, ongoing technological improvements, investment barriers, etc.
(see Appendix C paragraph b (vii) and paragraphs 45 (e), 46, 48 (b) of decision
17/CP.7).
Crediting period:
The crediting period for a CDM project activity is the period
for which reductions from the baseline are verified and certified by a designated
operational entity for the purpose of issuance of certified emission reductions
(CERs). Project participants shall choose the starting date of a crediting period to
be after the date the first emission reductions are generated by the CDM project
activity. A crediting period shall not extend beyond the operational lifetime of the
project activity.
The crediting period may only start after the date of registration of the proposed
activity as a CDM project activity. In exceptional cases, for project activities
starting between 1 January 2000 and the date of the registration of a first clean
development mechanism project, the starting date of the crediting period may be
prior to the date of registration of the project activity if the project activity is
submitted for registration before 31 December 2005 (please refer to paras 12 and
13 of decision 17/CP.7, paragraph 1 (c) of decision 18/CP.9 and clarifications by
the Executive Board, available on the UNFCCC CDM website).
The project participants may choose between two options for the length of a
crediting period: (i) fixed crediting period or (ii) renewable crediting period, as
defined in paragraph 49 (a) and (b) of the CDMM&P.
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74
Crediting period
�fixed (also fixed crediting period):
"Fixed Crediting Period"
is one of two options for determining the length of a crediting period. In the case
of this option, the length and starting date of the period is determined once for a
project activity with no possibility of renewal or extension once the project
activity has been registered. The length of the period can be a maximum of ten
years for a proposed CDM project activity. (paragraph 49 (b) of CDM modalities
and procedures).
Crediting period�renewable (also renewable crediting period):
"Renewable
crediting period" is one of two options for determining the length of a crediting
period. In the case of this option, a single crediting period may be of a maximum
of seven years. The crediting period may be renewed at most two times
(maximum 21 years), provided that, for each renewal, a designated operational
entity determines that the original project baseline is still valid or has been
updated taking account of new data, where applicable, and informs the Executive
Board accordingly (paragraph 49 (a) of the CDM modalities and procedures). The
starting date and length of the first crediting period has to be determined before
registration.
Certification:
Certification is the written assurance by the designated operational
entity that, during a specified time period, a project activity achieved the
reductions in anthropogenic emissions by sources of greenhouse gases (GHG) as
verified.
Certified emission reductions (CERs):
A certified emission reduction or CER is
a unit issued pursuant to Article 12 and requirements thereunder, as well as the
relevant provisions in the CDM modalities and procedures, and is equal to one
metric tonne of carbon dioxide equivalent, calculated using global warming
potentials defined by decision 2/CP.3 or as subsequently revised in accordance
with Article 5 of the Kyoto Protocol.
Conservative:
See "Transparent and conservative".
Designated operational entity (DOE):
An entity designated by the COP/MOP,
based on the recommendation by the Executive Board, as qualified to validate
proposed CDM project activities as well as verify and certify reductions in
anthropogenic emissions by sources of greenhouse gases (GHG). A designated
operational entity shall perform validation or verification and certification on the
same CDM project activity. Upon request, the Executive Board may however
allow a single DOE to perform all these functions within a single CDM project
activity. COP at its eight session decided that the Executive Board may designate
on a provisional basis operational entities (please refer to decision 21/CP.8).
Fixed Crediting Period:
See crediting period
�fixed.
Host Party:
A Party not included in Annex I to the Convention on whose
territory the CDM project activity is physically located. A project activity located
in several countries has several host Parties. At the time of registration, a Host
Party shall meet the requirements for participation as defined in paragraphs 28 to
30 of the CDM modalities and procedures.
Issuance of certified emission reductions (CERs):
Issuance of CERs refers to
the instruction by the Executive Board to the CDM registry administrator to issue
a specified quantity of CERs for a project activity into the pending account of the
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75
Executive Board in the CDM registry, in accordance with paragraph 66 and
Appendix D of the CDM modalities and procedures.
Upon issuance of CERs, the CDM registry administrator shall, in accordance with
paragraph 66 of CDM modalities and procedures, promptly forward the CERs to
the registry accounts of project participants involved, in accordance with their
request, having deducted the quantity of CERs corresponding to the share of
proceeds to cover administrative expenses for the Executive Board and to assist in
meeting costs of adaptation for developing countries vulnerable to adverse
impacts of climate change, respectively, in accordance with Article 12, paragraph
8, to the appropriate accounts in the CDM registry for the management of the
share of proceeds.
Leakage:
Leakage is defined as the net change of anthropogenic emissions by
sources of greenhouse gases (GHG) which occurs outside the project boundary,
and which is measurable and attributable to the CDM project activity.
Measurable and attributable:
In an operational context, the terms measurable
and attributable in paragraph 51 (project boundary) of the CDM modalities and
procedures should be read as "which can be measured" and "directly attributable",
respectively
Monitoring of a CDM project activity:
Monitoring refers to the collection and
archiving of all relevant data necessary for determining the baseline, measuring
anthropogenic emissions by sources of greenhouse gases (GHG) within the
project boundary of a CDM project activity and leakage, as applicable.
Monitoring methodology:
A monitoring methodology refers to the method used
by project participants for the collection and archiving of all relevant data
necessary for the implementation of the monitoring plan.
Monitoring methodology
�approved:
A monitoring methodology approved by
the Executive Board and made publicly available along with relevant guidance.
Monitoring methodology�new:
Project participants may propose a new
monitoring methodology. In developing a monitoring methodology, the first step
is to identify the most appropriate methodology bearing in mind good monitoring
practice in relevant sectors. Project participants shall submit a proposal for a new
methodology to a designated operational entity by forwarding a completed
"Proposed New Methodology: Baseline (CDM-NMB)" along with a completed
"Proposed New Methodology: Monitoring (CDMNMM)" and the project design
document (CDM-PDD) with sections A to E completed in order to demonstrate
the application of the proposed new methodology to a proposed project activity.
A new proposed methodology will be treated as follows: If the designated
operational entity determines that it is a new methodology, it will forward,
without further analysis, the documentation to the Executive Board. The
Executive Board shall expeditiously, if possible at its next meeting but not later
than four months review the proposed methodology. Once approved by the
Executive Board it shall make the approved methodology publicly available along
with any relevant guidance and the designated operational entity may proceed
with the validation of the project activity (applying the approved methodology)
and submit the project design document for registration. In the event that the
COP/MOP requests the revision of an approved methodology, no CDM project
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76
activity may use this methodology. The project participants shall revise the
methodology, as appropriate, taking into consideration any guidance received.
Operational lifetime of a project activity:
It is defined as the period during
which the project activity is in operation. No crediting period shall end after the
end of the operational lifetime (calculated as from starting date).
Project activity:
A project activity is a measure, operation or an action that aims
at reducing greenhouse gases (GHG) emissions. The Kyoto Protocol and the
CDM modalities and procedures use the term "project activity" as opposed to
"project". A project activity could, therefore, be identical with or a component or
aspect of a project undertaken or planned.
Project boundary:
The project boundary shall encompass all anthropogenic
emissions by sources of greenhouse gases (GHG) under the control of the project
participants that are significant and reasonably attributable to the CDM project
activity.
The Panel on methodologies (Meth Panel) shall develop specific proposals for
consideration by the Executive Board on how to operationalize the terms "under
the control of", "significant" and "reasonably attributable", as contained in
paragraph 52 and appendix C, paragraphs (a) (iii) and (b) (vi) of the CDM
modalities and procedures. Pending decisions by the Executive Board on these
terms, project participants are invited to explain their interpretation of such terms
when completing and submitting the CDM-NMB and CDM-NMM.
Project participants:
In accordance with the use of the term project participant in
the CDM modalities and procedures, a project participant is (a) a Party involved,
and/or (b) a private and/or public entity authorized by a Party to participate in a
CDM project activity.
In accordance with Appendix D of the CDM modalities and procedures, the
decision on the distribution of CERs from a CDM project activity shall
exclusively be taken by project participants.
Project participants shall communicate with the Executive Board, through the
secretariat, in writing in accordance with the "modalities of communication"
submitted together with the registration form.
If a project participant does not wish to be involved in taking decisions on the
distribution of CERs, this shall be communicated to the Executive Board through
the secretariat at the latest when the request regarding the distribution is made.
See also. "Authorization of a private and/or public entity to participate in a CDM
project activity " and "Request for distribution of CERs "
Renewable crediting period:
See Crediting period
�renewable.
Request for distribution of CERs:
The request regarding the distribution of
CERs can only be changed if all signatories of the previous instruction have
agreed to the change and signed the appropriate document.
A change of project participants shall immediately be communicated to the
Executive Board through the secretariat. The indication of change shall be signed
by all project participants of the previous communication and by all new and
remaining project participants. Each new project participant needs authorization,
as required.
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77
Stakeholders:
Stakeholders mean the public, including individuals, groups or
communities affected, or likely to be affected, by the proposed CDM project
activity or actions leading to the implementation of such an activity.
Starting date of a CDM project activity:
The starting date of a CDM project
activity is the date at which the implementation or construction or real action of a
project activity begins. Project activities starting between 1 January 2000 and the
date of the registration of a first clean development mechanism project have to
provide documentation, at the time of registration, showing that the starting date
fell within this period, if the project activity is submitted for registration before 31
December 2005.
Transparent and conservative:
Establishing a baseline in a transparent and
conservative manner (paragraph 45 (b) of the CDM modalities and procedures)
means that assumptions are made explicitly and choices are substantiated. In case
of uncertainty regarding values of variables and parameters, the establishment of a
baseline is considered conservative if the resulting projection of the baseline does
not lead to an overestimation of emission reductions attributable to a CDM project
activity (that is, in the case of doubt, values that generate a lower baseline
projection shall be used).
Registration:
Registration is the formal acceptance by the Executive Board of a
validated project activity as a CDM project activity. Registration is the
prerequisite for the verification, certification and issuance of CERs related to that
project activity.
Validation:
Validation is the process of independent evaluation of a project
activity by a designated operational entity against the requirements of the CDM as
set out in decision 17/CP.7 its annex and relevant decisions of the COP/MOP, on
the basis of the project design document (CDM-PDD).
Verification:
Verification is the periodic independent review and ex post
determination by a designated operational entity of monitored reductions in
anthropogenic emissions by sources of greenhouse gases (GHG) that have
occurred as a result of a registered CDM project activity during the verification
period. There is no prescribed length of the verification period. It shall, however,
not be longer than the crediting period.
Page 88
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79
7
9
Annex 8 Proposed New Methodology (CDM-NMB)
Baseline
Section A.
Identification of Methodology
A.1. Proposed
methodology
title:
Provide an unambiguous title for a proposed methodology. Avoid project-specific
titles. The title, once approved, should allow project participants to get an
indication of the applicability of an approved methodology.
A.2.
List of category (ies) of project activity to which the methodology may
apply:
Use the list of categories of project activities and of registered CDM project
activities by category available on the UNFCCC CDM website, please specify the
category (ies) of project activities for which this proposed new methodology may
be used. If no suitable category (ies) of project activities can be identified, please
suggest a new category (ies) descriptor and its definition, being guided by
relevant information on the UNFCCC CDM website.
A.3.
Conditions under which the methodology is applicable to CDM
project activities:
Provide conditions under which the methodology is applicable to CDM project
activities: (e.g. circumstances, region, data, availability, resource availability).
Please indicate if an approved methodology exists for the same conditions of
application.
A.4.
What are the potential strengths and weaknesses of this proposed new
methodology?
Please outline how the accuracy and completeness of the new methodology
compares to that of approved methodologies, in particular with regard to approved
methodologies for the same conditions of application.
Section B.
Overall Summary Description
Summarize the description of the proposed new methodology. Provide
information on how baseline emissions are determined. Provide step �by� step
instructions for the baseline methodology, including how through the
methodology, it can be demonstrated that a project activity is additional and
therefore not the baseline scenario (detailed explanation of the methodology to be
provided in section 6).
Please do not exceed more than 1 page.
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80
Section C.
Choice of and Justification As to Why One of the Baseline
Approaches Listed in Paragraph 48 of CDM Modalities and
Procedures is Considered to be the Most Appropriate
C.1
General baseline approach:
Please check a single option.
If the third approach is being checked kindly refer to additional guidance provided
by the Executive Board
�(see guidance and clarifications by the Executive Board
on the �guidance�clarifications� web page of the UNFCCC CDM website).
C.2.
Justification of why the approach chosen in C.1 above is considered
the most appropriate:
Section D.
Explanation and Justification of the Proposed New Baseline
Methodology
In accordance with the guidance of the Executive Board, a proposed new
methodology shall explain how a project activity using the methodology can
demonstrate that it is additional, that is different, from the baseline scenario.
Project participants shall therefore describe how to develop the baseline scenario
and �how the baseline methodology addresses� the determination of whether the
project is additional.� In addition, the methodology shall provide elements to
calculate the emissions of the baseline. The project participants shall ensure
consistency between the elaboration of the baseline scenario and the procedure
and formulae to calculate the emissions of the baseline.
D.1
Explanation of how the methodology determines the baseline scenario
(that is, indicate the scenario that reasonably represents the anthropogenic
emissions by sources of greenhouse gases (GHG) that would occur in the
absence of the proposed project activity):
Please state the basic assumptions of the baseline methodology and describe the
key analytical steps that should be followed in determining the baseline scenario.
Describe how the methodology determines the most likely scenario�the baseline
scenario�from among the plausible scenario alternatives.
D.2.
Criteria used in developing the proposed baseline methodology:
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81
D.3.
Explanation of how, through the methodology, it can be demonstrated
that a project activity is additional and therefore not the baseline scenario
(section B.3 of the CDM
� PDD):
Paragraph 43 of the CDM modalities and procedures stipulates that a CDM
project activity is additional if its emissions are below those of its baseline (see
guid
ance by the EB at its fifth meeting). �The baseline for a CDM project activity
is the scenario that reasonably represents the anthropogenic emissions by sources
of greenhouse gases that would occur in the absence of the proposed project
activity� (paragraph 44 CDM modalities and procedures).
Please refer to guidance and clarifications on baseline and monitoring
methodologies in the Guidance/Clarifications section of the UNFCCC CDM
website.
Please also include information on algorithms and formulae, if used.
D.4.
How national and/or sectoral policies and circumstances can be taken
into account by the methodology:
D.5.
Project boundary (gases and sources included, physical delineation):
Please describe and justify the project boundary bearing in mind that it shall
encompass all anthropogenic emissions by sources of greenhouse gases under the
control of the project participants that are significant and reasonably attributable
to the project activity.
Please describe and justify which the boundary.
D.6.
Elaborate and justify formulae/algorithms used to determine the
baseline scenario.
Variables, fixed parameters and values have to be reported (e.g. fuel(s)
used, fuel consumption rates):
Elaborate and justify formulae/algorithms used to determine the emissions
from the project activity. Variables, fixed parameters and values have to be
reported (e.g. fuel(s) used, fuel consumption rates):
D.8.
Description of how the baseline methodology addresses any potential
leakage of the project activity:
Please note:
Leakage is defined as the net change of anthropogenic emissions by
sources of greenhouse gases which occurs outside the project boundary and which
is measurable and attributable to the CDM project activity.
Please explain how leakage is to be estimated ax-ante and indicate in the
monitoring methodology form (CDM-NMM) how it is to be monitored ex-post.
Explain if leakage will be assumed or calculated either as a relative amount (i.e.
percentage) of the total emission reduction due to the project activity or as an
absolute amount of emissions.
Please describe algorithms, data, information and assumptions and provide the
total estimate of leakage.
Also include formulae and algorithms to be used in section E of the CDM-PDD
attached.
D.9. Elaborate and justify formulae/algorithms used to determine the
emissions reductions from the project activity. Variables, fixed parameters
and values have to be reported (e.g. fuel(s) used fuel consumption rate):
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82
Section E.
Data Sources and Assumptions
E.1.
Describe parameters and/or assumptions (including emission factors
and activity levels):
E.2.
List of data used indicating sources (e.g. official statistics, expert
judgment, proprietary data, IPCC, commercial and scientific literature) and
precise references and justify the appropriateness of the choice of such data:
E.3.
Vintage of data (e.g. relative to starting date of the project activity):
E.4.
Spatial level of data (local, regional, national):
Section F.
Assessment of Uncertainties (Sensitivity to Key Factors and
Assumptions)
Please highlight any factors and assumptions that would have a significant impact
on the baseline and/or the calculation of baseline emission levels and how
uncertainty related to those assumptions and factors are to addressed.
Section G.
Explanation of How the Baseline Methodology Allows for the
Development of Baselines in a Transparent and Conservative
Manner
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Monitoring (CDM-NMM)
Section A:
Identification of methodology:
A.1. Proposed
methodology
title:
Provide an unambiguous title for a proposed methodology. Avoid project-specific
titles. The title, once approved, should allow project participants to get an
indication of the applicability of an approved methodology.
A.2.
List of category (ies) of project activity to which the methodology may
apply:
Use the list of categories of project activities and of registered CDM project
activities by category available on the UNFCCC CDM website, please specify the
category (ies) of project activities for which this proposed new methodology can
be used. If no suitable category (ies) of project activities can be identified, please
suggest a new category (ies) descriptor and its definition, being guided by
relevant information on the UNFCCC CDM website.
A.3.
Conditions under which the methodology is applicable to CDM
project activities:
Provide conditions under which the methodology is applicable to CDM project
activities: (e.g. circumstances, region, data, availability, resource availability).
Please indicate if an approved methodology exists for the same conditions of
application.
A.4.
What are the potential strengths and weaknesses of this proposed new
methodology?
Please outline how the accuracy and completeness of the new methodology
compares to that of approved methodologies, in particular with regard to approved
methodologies for the same conditions of application.
Section B.
Proposed new monitoring methodology
Please provide a detailed description plan, including the identification of data and
its quality with regard to accuracy, comparability, completeness and validity.
Different types of project activities will have different monitoring requirements.
For some project activities, emissions reductions are calculated as the differences
between the project activity and the baseline emissions. For others emission
reductions are monitored directly.
Depending on the type of project activity, please fill out their option 1 or option 2.
Option 1 (section 2.2): Please describe the data and information that will be
collected in order to monitor the emissions in the baseline scenario and the project
scenario.
Option 2 (section 2.3): Please describe the data and information that will be
collected in order to directly monitor and calculate the emission reductions from
the project activity.
B.1.
Brief description of the new methodology:
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84
Please outline the main points and give a reference to a detailed description of the
monitoring methodology.
B.2.
Option 1: Monitoring of the emissions in the project scenario and the
baseline scenario:
B.2.1. Data to be collected or used in order to monitor emissions from the
project activity, and how this data will be archived:
Monitored data shall be archived for 2 years following the end of the crediting
period.
Header of table and titles of columns shall not be modified and columns shall not
be deleted.
Please add rows to the table below, as needed.
B.2.2. Description of formulae used to estimate project emissions (for each
gas, source, formulae/algorithm, emissions units of CO
2e
):
Formulae should be consistent with the formulae outlined in the description of the
baseline methodology.
B.2.3.
Relevant data necessary for determining the baseline of
anthropogenic emissions by source of greenhouses gases (GHG) within the
project boundary and how such data will be collected and archived:
Monitored data shall be archived for 2 years following the end of the crediting
period.
Header of table and titles of columns shall not be modified and columns shall not
be deleted.
Please add rows to the table below, as needed.
B.2.4. Description of formulae used to estimate baseline emissions (for each
gas, source, formulae/algorithm, emissions units of CO
2e
):
Formulae should be consistent with the formulae outlined in the description of the
baseline methodology.
B.3.
Option 2: Direct Monitoring of Emission Reductions from the Project
Activity
Value should be consistent with those in section E of the CDM-PDD.
B.3.1. Data to be collected or used in order to monitor emissions from the
project activity, and how data will be archived.
Monitored data shall be archived for 2 years following the end of the crediting
period.
Header of table and titles of columns shall not be modified and columns shall not
be deleted.
Please add rows to the table below, as needed.
B.3.2. Description of formulae used to calculate project emissions (for each
gas, source, formulae/algorithm, emissions units of CO
2e
):
Formulae should be consistent with the formulae outlined in the description of the
baseline methodology.
B.4.
Treatment of leakage in the monitoring plan:
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85
Please explain if leakage will be monitored during the implementation of the
project activity. If relevant, please explain and justify if leakage will not be
estimated ex-post. Explain if leakage will be calculated as the difference between
emissions occurring outside the boundaries of the project and emissions in the
baseline scenario, or if leakage will be monitored directly.
B.4.1. If applicable, please describe the data and information that will be
collected in order to monitor leakage effects of the project activity:
Monitored data shall be archived for 2 years following the end of the crediting
period.
Header of table and titles of columns shall not be modified and columns shall not
be deleted.
Please add rows to the table below, as needed.
B.4.2. Description of formulae used to estimate leakage (for each gas, source,
formulae/algorithm, emissions units of CO
2e
):
Formulae should be consistent with the formulae outlined in the description of the
baseline methodology.
B.5.
Description of formulae used to estimate emission reductions for the
project activity (for each gas, source, formulae/algorithm, emissions units of
CO
2e
):
Formulae should be consistent with the formulae outlined in the description of the
baseline methodology.
B.6.
Assumptions used in elaborating the new methodology:
Please list information used in the calculation of emissions which is not measured
or calculated, for example use of any default emission factors.
B.7.
Please indicate whether quality control (QC) and quality assurance
(QA) procedures are being undertaken for the items monitored:
See tables in sections B.2 or B.3 and B.4 above.
Header of table and titles of columns shall not be modified and columns shall not
be deleted.
Rows are allowed to be added, as needed.
B.8.
Has the methodology been applied successfully elsewhere and, if so, in
which circumstances?