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Expected Average Annual CERs from Registered Projects by Host Party

1.5 The ‘Additionality’ Quandary for CDM

The concept of Additionality is fundamental to the environmental integrity of any CDM project. The Protocol explicitly implies in its provision that the Additionality of a project is crucial to the acceptance of the project for certification.69 There is a misconception about CDM that by itself it can reduce emissions. However, according to Wara et al., (2008), the point was argued that since the Additionality factor in CDM can never be 100% ascertained due to lack of credibility in the Additionality test of CDM projects leading to issuance of CERs for CDM projects.70 CDM can therefore be considered only as an offset mechanism. It is however not, an understatement to suggest that the credibility of offsets in the global carbon market is lower when compared to that of cap and trade system. Although the Additionality quandary in CDM has been highlighted by different scholars and project

Development Institute of Political Science, University of Zurich, Zurich Switzerland and McCully, P., 2008, ‘The great carbon offset swindle: how carbon credits are gutting the Kyoto Protocol, and why they must be scrapped’, in: International Rivers Network (IRN), Bad Deal for the Planet: Why Carbon Offsets Aren’t Working and How to Create a Fair Global Climate Accord, International Rivers, Berkeley, CA

67Supra note [Schneider, 2007]

68 Alex Michaelowa 2008, “Discounting of CERs to avoid CER import caps” Perspective GmbH

69 Article 12 of the Kyoto Protocol

70 Wara, M., Victor, D.G., 2008, A realistic Policy on International Carbon Offsets, Working Paper 74, Stanford, CA..

51 participants, the fix for it is still elusive and should be an integral part of any post Kyoto CDM framework and in particular the implementation of CCS under a CDM framework due to potentially large quantities of CERs produced by CCS projects.

A study carried out by Sutter and Parreno in 2005 suggested at the time, there was a 30% rise of Additionality issues in all registered CDM projects.71 Has this trend changed? There is however no clear evidence to state otherwise and to the best of my knowledge no further study has been conducted to ascertain this. The difficulty encountered in defining or calculating what is additional in any given CDM project is compounded by the fact that the different institutional players in the project cycle are either ill equipped for this task72 or are deliberately or unknowingly taking advantage of the flaws in the system.73 The following issue are considered to be the possible reasons for the quandary. Firstly the challenge of demonstrating

Additionality and the multiplicity of methods available to verify the suitability or demonstrate the Additionality of a CDM project, and secondly, the potential for host countries to manipulate environmental policies as discussed in section 1.5.1 and section 1.6 respectively.

1.5.1 Demonstration of Additionality

Two of the main controversies associated with CDM Additionality (as fundamental as it is to the legitimacy of environmental integrity of CDM projects) are the

approaches used to demonstrate Additionality and the acceptance of such approach’s credibility and suitability.74 The debate has lingered within the international climate change community since it was introduced into CDM. It is generally accepted that the environmental integrity of CDM is dependent on the Additionality clause however the demonstration and interpretation of this remains vague, subjective uncertain and almost indeterminable without significant recourse to errors in the process.75 The fundamental challenge however remains as to the assumption that a

71Sutter C., and Parreno J., 2005, “Does the current Clean Development Mechanism deliver it sustainable development claim?” International Conference: Climate or Development? 28-29 October 2005 Hamburg institute of International Economics, Hamburg Germany.

72 As this is the case for the EB most of the members of the board are not technically robust enough to understand and deal with the technicalities associated with the determination of what is additional.

73 This is mostly the case with host countries that develop policies to go round the determination of Additionality.

74 Schneider 2007

75Id.

52 CDM project implementation is hypothetical and counter-factual undermining any possibility for absolute certainty. It remains the objective of all concerned to find an objective and transparent method(s) of determining what is additional about a project and provides for the avoidance of non-additional projects or “lost opportunity”

projects.76

Different methods of determining Additionality have been articulated and submitted to the CDM-EB, the most consistent and commonly used of the methods in

demonstrating baseline and monitoring methodologies vis-à-vis Additionality are mainly the following.

1.5.1.1 Barrier Analysis

This approach remains the most popular, used in over 74% of the analysed projects by Schneider77 but however it remains clear that it is not without its flaws. Its aim is to demonstrate that barriers exist that would prevent the proposed project from being conducted under a business as usual scenario. This analysis has been flawed by some serious challenges. Such flaws include the credibility of the barriers presented, the cost associated with the project, current or prevailing practices, lack of or

insufficient evidence (such as information on the stakeholder consultation process) on the impact of CDM project on overcoming such barrier, and Institutional assessment of the barriers by DOEs.78

Analysis of the barrier showed its weakest when it is comes to its credibility.

Furthermore, Schneider 2007 was able to show that 43% of analysed projects did not provide credible explanation to why the identified barrier would prevent the

proposed project.79 Other issues of speculation and subjectivity in the process of demonstrating the Additionality factor in the projects include policy risk claims, prohibitive technology risks assertions, the financial risk impact vis-à-vis the risks associated with currency exchange rates, computation of the feed-in-tariff or how any of this financial indicators could impact on the project.80

With regards to CCS–CDM projects, such weakness will even be more significant due to the complexities involved in the implementation and determining

Additionality criteria in such a large scale project with minimal data to work with

76Id.

77Id. pg.30

78Id.

79Id. pg.31

80Id.

53 due to lack of precedence of implementation under the CDM framework. It is unclear how such weakness in the barrier analysis would impact IRR and the CERs issued but it is clear that it will significantly compromise the environmental integrity of the CDM project in mitigating climate change since it has the potential to generate large quantity of CERs.

1.5.1.2 Investment Barrier

This analysis requires that another project (which will act as the baseline project) is more economically or financially attractive to the proposed CDM project. To reach this conclusion of economic attractiveness, it is expected that the investment analysis must use sensitivity analysis to show that the conclusion is robust and will stand reasonable variation with the critical assumptions.81 However, in situation where CERs revenue is the only economic benefit accrued to the project, a “simple cost analysis” in the Additionality tool and the combined tool is used to show the above two indicators (i.e. robustness of investment analysis and reasonable variation).

Although barrier analysis remains the most frequently used for CDM projects, Additionality test investment analysis hold a third of the analysed projects most of which are large scale projects. Benchmark analysis represent 61%, while investment comparison and simple cost analysis hold 23% and 16% respectively.82

1.5.1.3 Common Practice Analysis

The common practice analysis must accentuate the rarity of the project in the region or country. The assessment considers the plurality of such project activity in the geographical location and how this could be used as bases to prove Additionality.

Unfortunately this demonstration method by itself cannot justify Additionality as this could have been the bases for it in Non Annex 1 nation like Nigeria where there is obviously no such project in the country. This common practice analysis is a mandatory step in the Additionality tool and combined tool but it is however required in addition to the barrier and investment analysis to justify or prove Additionality of a project activity.

The merit of the common practice analysis is the ability to approach assessment objectively without considering issues that are subjective to the project proponent. It is based on facts easily accessible under normal condition. However the weaknesses

81Id.

82Id.

54 include the lack of adequate provision with the current framework as to the

definition of when a project activity should be considered as common practice. Also, what would be considered a comparable technology or the bases for such

comparison?