The CDM:

Project-Cycle & Institutions

Robert Kelly
Regional Coordinator, CDM Capacity Development,
Southern & Eastern Africa
robert.kelly@undp.org

Presentation 3, Addis Ababa, May 8th, 2008

Agenda

Governance structure of the CDM

CDM project cycle & institutions

1 1
International CDM bodies
Conference
Conference of of Parties
Parties to
to the
the UNFCCC,
UNFCCC,
Meeting
Meeting of
of the
the Parties
Parties to
to the
the Kyoto
Kyoto Protocol
Protocol (COP/MOP)
(COP/MOP)

CDM
CDM Executive
Executive Board
Board (CDM-EB)
(CDM-EB) CDM EB operates under the authority of the COM/MOP
Recommends
Recommends to to the
the EB
EB on
on the
the accreditation
accreditation of
of an
an
Applicant
Applicant Entity
Entity (AE),
(AE), suspension,
suspension, withdrawal
withdrawal
Accreditation
Accreditation Panel
Panel and/or
and/or re-accreditation
re-accreditation ofof aa DOE
DOE

Afforestation
Afforestation and
and Reforestation
Reforestation Recommends
Recommends toto the
the EB
EB on
on baseline
baseline and
and
Working
Working Group
Group monitoring
monitoring methodologies
methodologies for
for A/R
A/R CDM
CDM

Recommend
Recommend toto the
the EB
EB on
on baseline
baseline and
and monitoring
monitoring
Methodology
Methodology Panel
Panel methodologies, revisions to the PDD, etc.
methodologies, revisions to the PDD, etc.

Recommend
Recommend toto the
the EB
EB on
on baseline
baseline and
and monitoring
monitoring
Small
Small Scale
Scale CDM
CDM Panel
Panel methodologies for small-scale project activity
methodologies for small-scale project activity

CDM
CDM Registration
Registration and
and Issuance
Issuance Assists
Assists the
the CDM
CDM EBEB by
by appraising
appraising requests
requests for
for
Team
Team project
project registration
registration and
and requests
requests for
for CER
CER issuance
issuance

2 2
Agenda

Governance structure of the CDM

CDM project cycle & institutions

3 3
The CDM project cycle
6 to 12 months 1.5 months Crediting period of the project
Developer
Project

Project
Project CDM
CDM project
project
feasibility
feasibility development
development
assessment
assessment // PDD
PDD
// PIN
PIN
DNA

Host
Host country
country
approval
approval

Project Project
DOE

Project Project
validation
validation verification
verification
Executive
Board
CDM

Project
Project CER
CER
registration
registration issuance
issuance

4 4
The CDM project cycle
6 to 12 months 1.5 months Crediting period of the project
Developer
Project

Project
Project CDM
CDM project
project
feasibility
feasibility development
development
assessment
assessment // PDD
PDD
// PIN
PIN
DNA

Host
Host country
country
approval
approval

Project Project
DOE

Project Project
validation
validation verification
verification
Executive
Board
CDM

Project
Project CER
CER
registration
registration issuance
issuance

5 5
The Project Idea Note (PIN)

• The PIN is typically a five-page document providing information on a

CDM project

• Some countries require a PIN in order to be able to obtain a letter of

endorsement from the DNA of the host country

• The PIN is typically used as a marketing tool – to distribute to

potential CDM investors to begin negotiations on partnership or
purchase of CERs

• The PIN has three main components:

– Project description – type of project, location, schedule, etc.
– Finance – expected costs and expected revenues
– Expected environmental and social benefits

6 6
The CDM project cycle
6 to 12 months 1.5 months Crediting period of the project
Developer
Project

Project
Project CDM
CDM project
project
feasibility
feasibility development
development
assessment
assessment // PDD
PDD
// PIN
PIN
DNA

Host
Host country
country
approval
approval

Project Project
DOE

Project Project
validation
validation verification
verification
Executive
Board
CDM

Project
Project CER
CER
registration
registration issuance
issuance

7 7
The Project Design Document (PDD)

• An official component of the CDM project cycle

• Official standardised template is available from the UNFCCC website

• Covers all the information essential for ‘carbon layer’ assessment

• Incorporates significant project thinking – project design, partnerships,

funding, revenue and cost forecasts, due diligence, sensitivity analysis,
etc.

• The PDD is validated by a Designated Operational Entity and describes

the baseline and monitoring methodology that must be carried out

• PDDs are public documents

8 8
The CDM project cycle
6 to 12 months 1.5 months Crediting period of the project
Developer
Project

Project
Project CDM
CDM project
project
feasibility
feasibility development
development
assessment
assessment // PDD
PDD
// PIN
PIN
DNA

Host
Host country
country
approval
approval

Project Project
DOE

Project Project
validation
validation verification
verification
Executive
Board
CDM

Project
Project CER
CER
registration
registration issuance
issuance

9 9
The DNA and host country approval
• The Designated National Authority (DNA) is the legal entity authorised to
sign a Letter of Approval (LoA) for a CDM project

– Typically an inter-ministry agency (Environment, Economy, Energy,

Meteorology, etc.) with a small secretariat

• The DNA provides written approval that the CDM project assists in
achieving the country’s sustainable development

– The details of the approval procedure are up to each country

– Typically, 3 broad development criteria are employed:

– Economic: the project has a positive effect on economic

development

– Environmental: the project leads to reduced pressure on the

environment

– Social: the project has positive effects on social development

1010
Letter of approval - example
[State Forest Agency “MOLDSILVA”]

No.018– 03/9.04 from 2nd of September, 2004

ref No. 01-07/401 from 20th of July 2004

On examination of the project proposals

“Soil conservation in the Republic of Moldova”

Through the present, we acknowledge that the the Supreme Designated National Authority, responsible for the implementation of
the Clean Development Mechanism of the Kyoto Protocol, has examined on its meeting from 9th of August 2004 the project “Soil
Conservation in the Republic of Moldova”, elaborated and presented by the State Forest Agency “MOLDSILVA”. As result of
examination, the National Commission concluded the following:

The State Forest Agency “MOLDSILVA” is the only responsible for elaboration and implementation of the CDM Project “Soil
Conservation in the Republic of Moldova”. In the name of the Government of the Republic of Moldova, the Agency has negotiated
and contracted with the World Bank Prototype Fund all the conditions of the CDM Project (Government Resolution No. 1155 from
26th of September 2003).

In case of implementation of the CDM Project in its actual version, the planned activities would essentially contribute to the
sustainable development of the Republic of Moldova and would positive influence the quality of the environment.

Through this CDM Project, the Republic of Moldova is participating on voluntary basis on realization of the Clean Development
Mechanism of the Kyoto Protocol.

Constantin MIHAILESCU
Minister, Ministry of Ecology and Natural Resources,
Chair of the National Commission
1111
Other host country requirements
• Compliance with national policies:
– Environmental Impact Assessment

– Sectoral regulations (construction permits, licences, etc)

– Compatibility with local/sectoral strategies and priorities

• Public participation:
– Comments by local stakeholders directly and indirectly
involved with the project

• Infrastructure and technical capacity:

– Local availability of qualified human resources

– Local availability of adequate institutional resources

1212
The CDM project cycle
6 to 12 months 1.5 months Crediting period of the project
Developer
Project

Project
Project CDM
CDM project
project
feasibility
feasibility development
development
assessment
assessment // PDD
PDD
// PIN
PIN
DNA

Host
Host country
country
approval
approval

Project Project
DOE

Project Project
validation
validation verification
verification
Executive
Board
CDM

Project
Project CER
CER
registration
registration issuance
issuance

1313
Project validation

Validation – a process of systematic assessment leading to a

statement on the reasonableness of the assertion of future
greenhouse gas performance

Basically – is the plan reasonable?

1414
Project validation
A required ‘pre-approval’ step for CDM project registration

Undertaken before the project crediting period, and (typically) before

implementation / construction of the project

Requires assessment of the assumptions, calculations, methodologies

and justifications relating to the baseline scenario

– Is the project truly additional?

– Will the greenhouse gas emission reductions be monitored

and calculated appropriately?

Provides no assurance of the project’s future performance!

1515
Project validation
Undertaken by Designated Operational Entities (DOEs):
– Essentially audit companies:
– Confirm that the PDD conforms to CDM requirements and
correctly applies the baseline methodology and
greenhouse gas quantification procedures
– Check calculations are accurate and assumptions are
reasonable in the PDD
– Confirm that the project satisfies the additionality
requirement
– Make the PDD available for public review

Submit the PDD to the CDM Executive Board for registration

(together with Letter of Approval from the DNA)

1616
The independence of DOEs

CDM
CDM
Executive
Executive
Board
Board
(2 nd
(2nd party)
party)

accountability assurance

GHG

t
Assertion

en
m
te
Project
Project
st
a Validator/
Validator/ Independence
Proponent
Proponent Verifier
Verifier shown by no
(DOE)
(DOE) financial
(1stst party)
(1 party) independence interest
(3rd
(3 rd party)
party)

1717
DOEs are accredited for specific sectoral scopes
Scope Number Sectoral Scope
1 Energy industries (renewable / non-renewable sources)
2 Energy distribution
3 Energy demand
4 Manufacturing industries
5 Chemical industries
6 Construction

7 Transport

8 Mining / mineral production

9 Metal production

10 Fugitive emissions from fuels (solid, oil and gas)

11 Fugitive emissions from HFCs & SF6

12 Solvent use

13 Waste handling & disposal

14 Afforestation & reforestation

15 Agriculture

1818
DOEs – market shares

Share of CDM Validations, March 2008

Other, 5%
TÜV-Rhein, 5%
TÜV-Nord, 6%
BV Cert, 6%
DNV, 42%

SGS, 13%

TÜV-SÜD, 25%

1919
The CDM project cycle
6 to 12 months 1.5 months Crediting period of the project
Developer
Project

Project
Project CDM
CDM project
project
feasibility
feasibility development
development
assessment
assessment // PDD
PDD
// PIN
PIN
DNA

Host
Host country
country
approval
approval

Project Project
DOE

Project Project
validation
validation verification
verification
Executive
Board
CDM

Project
Project CER
CER
registration
registration issuance
issuance

2020
Project registration

The CDM Executive Board checks that the submitted PDD and
accompanying documents are complete

The CDM Registration Fee is paid

The PDD is then placed on the UNFCCC website for a period of 8

weeks for public comment – known as a “request for registration”

The CDM Executive Board can request changes to the project design
or can reject the project outright

Otherwise, the project is formally registered as a CDM project

2121
Project registration fee
• The registration fee covers the Executive Board’s administrative expenses
• The registration fee is:
− 10 US cents per CER issued for the first 15,000 CERs
− 20 US cents per CER issued for any amount in excess of 15,000 CERs for a
given year
• The maximum registration fee is $350,000
• No registration fee has to be paid for CDM project activities with expected
average annual emission reductions below 15,000 CERs

Average Annual Emission Reduction US$

10,000 tCO2e -
15,000 tCO2e $ 1,500
30,000 tCO2e $ 4,500
100,000 tCO2e $ 18,500
1,757,500 tCO2e $ 350,000
3,000,000 tCO2e $ 350,000

2222
Project registration fee

• No registration fee has to be paid for CDM project activities hosted in

least developed countries:

− E.g. Ethiopia, Mozambique, Tanzania, Zambia

− But not (for example)…Botswana, Kenya, Mauritius

• The PDD constitutes the basis for the calculation of the registration fee

• If an activity is not registered, any registration fee above $30,000 is

reimbursed

2323
The CDM project cycle
6 to 12 months 1.5 months Crediting period of the project
Developer
Project

Project
Project CDM
CDM project
project
feasibility
feasibility development
development
assessment
assessment // PDD
PDD
// PIN
PIN
DNA

Host
Host country
country
approval
approval

Project Project
DOE

Project Project
validation
validation verification
verification
Executive
Board
CDM

Project
Project CER
CER
registration
registration issuance
issuance

2424
Project verification

Verification – a process of systematic assessment leading to a

statement confirming the assertion that past greenhouse gas
performance has been appropriately calculated and reported

Basically – provides confirmation of the greenhouse gas

assertion

2525
Project verification
Undertaken after the CDM project has been implemented and has
started to generate greenhouse gas reductions. Typically requires
rigorous data collection, testing and evaluation of evidence to present
a complete audit trail

Essentially, seeks to confirm two things:

– that past greenhouse gas performance has been appropriately

calculated and reported

– that the project has been executed in accordance with the

validated PDD

Verification is undertaken by a DOE – but not the one that performed

the validation
Verification can take place as often as the project developer
wishes – represents a balance between cost and revenue
2626
The link between validation and verification
Before the project…

Validation gives assurance that if the project is implemented according to

the Project Design Document (PDD) then it will meet CDM eligibility criteria
and that, once verified, CERs will be issued.

- Once validation is achieved, the bargaining power of the project

developer increases considerably – as does the price of the CERs

During the project…

Verification provides assurance that the project developer has adhered to

the validated PDD and that emission reductions have, in fact, taken place.

- Once results are verified, CERs can be issued. These are a uniform
(hard) currency, and have a higher value than any ‘projected’ CERs

2727
What you need to know about validation…

The cost of validation of a project depends on:

• The complexity of the project

• Quality of the PDD

• Quality of underlying control and information systems

If the PDD fails validation – you do not have a project!

2828
What you need to know about verification…

The best project in the world is worthless if not monitored properly:

- If the project developer does not collect (with calibrated

instruments), process and record relevant data during the
operation of the project, it is usually not possible to reconstruct
(back-cast) this data

If data is not transparently available to the DOE, certification will not be

possible

- If the Monitoring Report fails verification, the project cannot be

issued with CERs

2929
The CDM project cycle
6 to 12 months 1.5 months Crediting period of the project
Developer
Project

Project
Project CDM
CDM project
project
feasibility
feasibility development
development
assessment
assessment // PDD
PDD
// PIN
PIN
DNA

Host
Host country
country
approval
approval

Project Project
DOE

Project Project
validation
validation verification
verification
Executive
Board
CDM

Project
Project CER
CER
registration
registration issuance
issuance

3030
Certification and CER issuance
• The DOE provides a verification report to the project participants and
the executive board. The report is made publicly available.

• The verification report constitutes a request for issuance to the

Executive Board of CERs equal to the verified amount of reductions
of anthropogenic emissions by sources of greenhouse gases.

• The issuance of CERs is considered final 15 days after the date of

receipt of the request for issuance.

• The Executive Board then instructs the CDM registry to issue the
specified quantity of CERs in the CDM registry:
− A Share of Proceeds (SOP-Admin) fee is deducted
− 2% of the total CERs are deducted as a “SOP-Adaptation fee”
− The remaining CERs are forwarded to the registry accounts of
the project participants involved

3131
Share of Proceeds Administration (SOP-Admin) payment

• The SOP-Admin fee is levied at the time of issuance of CERs

• The SOP-Admin fee covers the Executive Board’s administrative

expenses

• The SOP-Admin fee is:

− 10 US cents per CER issued for the first 15,000 CERs

− 20 US cents per CER issued for any amount in excess of 15,000
CERs for a given year

• The registration fee is deducted from the SOP-Admin fee

• No SOP-Admin fee has to be paid for CDM project activities hosted in

least developed countries

3232
Share of Proceeds Adaptation (SOP-Adaptation) payment

• 2% of issued CERs are diverted to an Adaptation Fund to enable

developing countries meet the costs of adapting to climate change

• CDM projects in least developed countries are exempt from the SOP-
Adaptation payment

• Administered by the Adaptation Fund Board, with the Global

Environment Facility (GEF) acting as “interim” Secretariat and the World
Bank acting as “interim” Trustee

• Controversies over management as the Adaptation Fund is not funded

by donors

• The Fund currently contains 2.7 million CERs – and may contain 36
million CERs by the end of 2012

• At a price of EURO 15/CER: EURO 540 million ($810 million)

3333
 End

Robert Kelly
Regional Coordinator, CDM Capacity Development,
Southern & Eastern Africa

robert.kelly@undp.org

3434