Carbon Offsetting - How Projects are Implemented

The Stages of the CDM Project Cycle

This chapter provides a brief overview of how offset projects are developed under the CDM. The CDM has established detailed guidelines and procedures for project developers. Although the project development process for projects implemented under a voluntary offset standard are somewhat different from CDM procedures, the CDM project cycle can serve as a frame of reference to analyze the different standards.

The CDM Executive Board (CDM EB) requires that all CDM projects follow a set of project development steps that are referred to as the project cycle. CDM project activities can only deliver Certified Emission Reductions (CERs) if the project itself and its successful operation have been approved by the CDM EB. Each stage of the project cycle is outlined below.

The CDM Project Cycle

Project Design

The Project Design stage includes developing a project concept, choosing or developing a baseline and monitoring methodology, and stakeholder consultations. All of these elements are documented in the project design document (PDD).

Project Concept

A feasibility study of a potential CDM project is conducted to assess the technical feasibility, investment requirements, development and operational costs, expected returns, administrative and legal hurdles, and project risks and pitfalls. Based on the results of the feasibility study, the project owner will decide whether or not to continue development of the potential CDM project.

Methodology

A CDM methodology defines the rules that a project developer needs to follow to establish a project baseline and to determine project additionality (see chapter 5.1), to calculate emission reductions and to monitor the parameters (e.g. electricity produced by the project) used to estimate actual emission reductions. It is a generic recipe that can be applied to different projects within a given project type (e.g. renewable power production) and applicability conditions (e.g. grid-connected). If no approved methodology exists for a specific project type, a project developer can submit a new methodology for approval to the CDM Methodology Panel¹.

236 methodologies have been submitted for approval, 110 have been rejected, 28 are pending and 98 methodologies have been approved so far².

Project Design Document (PDD)

The Project Design Document (PDD) describes the CDM project activity in detail and forms the basis for all future planning and administrative procedures. It contains a description of the chosen technology and explains the methodology used to define the baseline scenario, to confirm additionality and to calculate emission reductions. It also contains information on the monitoring of all relevant technical parameters (e.g. temperature, gas flow rates, electricity productions, operation hours, etc.) including, how monitoring procedures will be established, measurements will be made, quality will be controlled, and records will be stored and accessed. It contains an estimate of the volume of emission reductions achieved by the project. Finally, it documents how the project contributes to sustainable development.

The PDD plays a central role in project development. It serves as the basis for evaluating all carbon credit transactions and contract proposals for a CDM project. The PDD is used throughout the implementation phase to ensure that the project performs according to the parameters outlined in the document.

Stakeholder Consultation(s)

CDM projects are required to provide evidence that the project’s activities will not adversely impact local populations and other relevant stakeholders. To ensure that all relevant stakeholders have been provided an opportunity to comment on the proposed CDM project, the project developer must inform them about the project through appropriate forms of media. The project developer must respond to all stakeholder comments, and describe a course of action to minimize negative impacts. The outcomes of the stakeholder consultations must be documented in the Project Design Document (PDD).

Project Validation

After the project developer has written the PDD, an independent UN-approved third-party auditor conducts the project validation. Under CDM auditors are called Designated Operational Entities or DOEs. The process of CDM project validation normally consists of four phases:

a desk review of the PDD,
on-site visits and follow-up interviews with project stakeholders,
a 30 day public comment period after the PDD has been made available through the internet
resolution of outstanding issues, and
the issuance of the final validation report and written by the DOE.

After completion, the validation report and the PDD are submitted to the CDM Executive Board for review and registration.

Host Country Approval

Final acceptance of a CDM project by the CDM EB is not possible without the approval of the project’s host country. The project documentation must be submitted to the relevant authority which checks the project activity against national rules and regulations and confirms the project’s compliance with the host country’s sustainability criteria. This screening process and host country requirements vary from country to country.

Project Registration

The registration of a project by the CDM EB as a CDM project is a major step in the CDM project cycle. The CDM EB’s decision to register a project is based on the review of the PDD and the validation report and public feedback. Once the CDM EB approves a project it is officially registered as a CDM project.

Project Implementation

The project can begin implementation anytime during the project cycle. However, if the project is implemented before it is registered by the CDM Executive Board, then the project developer has to supply documentary evidence proving that they considered CDM revenues at the time of planning the project. The documentary evidence must be supplied at the time of seeking CDM registration. If documentary evidence is not supplied, then the project is likely to be rejected on the grounds that it is not additional.

Project Monitoring

Project developers are required to maintain records measuring the emission reduction achieved during the operation phase. These records, maintained in a monitoring report, must be in accordance with the parameters and procedures laid out in the original PDD that was validated by the DOE and registered by the CDM EB. Emission reductions are issued based on the monitoring report. Therefore, a project developer will make the trade-off between having continuous CER income (many short monitoring periods) and lower administrative costs (long monitoring periods). There are no requirements as to how long or short a monitoring period must be as they ranges from a few weeks to several years.

Project Verification

The monitoring that the project developer has done is then evaluated and approved by a DOE. To minimize conflict of interest, the validating DOE cannot also conduct project verification. A different auditor must be chosen for this task.This is called Project Verification. The project developer has to submit the monitoring report to the DOE along with relevant supporting documents. The DOE undertakes a desk review of the report to ensure that the monitoring has been carried out in accordance with the procedures laid out in the original PDD. The DOE may also undertake a site visit, if necessary. Following the desk review and site visit, the DOE prepares a draft verification report highlighting any issues in the process. Once the project developer resolves these issues, the DOE prepares the final verification and certification report, which also quantifies the actual emission reductions achieved by the project.

Verification is done at time intervals freely chosen by the project developer or project owner and is usually a consideration between having low costs (long intervals) and frequent sales revenues (short intervals).

Project Certification

The verification report is submitted to the CDM EB for certification and issuance of CERs. The issued CERs are then transferred to the CDM registry account of the relevant project participant after the mandatory fees are paid to the UNFCCC secretariat.

Commercialization

At the commercialization stage, a project developer sells the carbon credits from a project to a prospective buyer. The credits can either be sold directly to a company that requires it to meet its legally binding or voluntary emission reduction obligations or it can be sold to a trading company that facilitates the transaction between the seller and the end user of the credits.

A contract to sell the carbon credits from a project can be signed at any stage during the project development cycle. Depending on the project developer’s risk appetite, some will sign contracts as early as the planning stage (i.e. forward contracts), lock in the price and other terms, and insulate themselves from the risks of price volatility while others will wait until the credits are generated, certified and issued before selling them (i.e. spot market sales). The project developer usually receives payment for the credits only after they have been delivered. However, in a few cases, a project developer may receive an advance payment. This is usually done if the project developer wants to bridge an investment gap or needs to meet cash flow requirements during the project’s implementation (see chapter 6.3).

Who is Who in a Carbon Offset Project

Designing, implementing and operating a carbon offset project requires the involvement of a large number of parties, stakeholders and authorities. Even though the parties involved differ from project to project some general categories and types of stakeholders can be defined as follows.

Project Owner

The operator and owner of the physical installation where the emission reduction project takes place can be any private person, company or other organisation.

Project Developers

A person or organisation with the intention to develop an emission reduction project could be the project owner, a consultant or specialized services provider.

Project Funders

Banks, private equity firms, private investors, non-profit organizations and other organizations may lend or invest equity to fund a project. Some of the standards have rules to what kind of funding, aside from the offset revenue, are acceptable for an offset project.

Stakeholders

Stakeholders are individuals and organizations that are directly or indirectly affected by the emission reduction project. Stakeholders include the parties interested in developing a specific project (e.g. owner, developer, funder, local population, host community), parties affected by the project (e.g. local population, host community environmental and human rights advocates) and national and international authorities.

Third Party Auditors Validators and Verifiers

The CDM and many of the voluntary offset standards require a third-party auditor to validate and verify a project’s climate saving potential and achieved emission reductions. Under CDM the auditors are called Designated Operational Entities (DOEs). To minimize conflict of interest, the validating DOE cannot also conduct project verification.

Standards Organisation

In the absence of national and international legislation, standard organizations define a set of rules and criteria for voluntary emission reduction credits.

Brokers and Exchanges

In the wholesale market, emission offset buyers and sellers can have a transaction facilitated by brokers or exchanges. Exchanges are usually preferred for frequent trades or large volumes of products with standardized contracts or products, while brokers typically arrange transactions for non-standardized products, occasionally traded and often in small volumes.

Trader

Professional emission reduction traders purchase and sell emission reductions by taking advantage of market price distortions and arbitrage possibilities.

Offset Providers

Offset providers act as aggregators and retailers between project developers and buyers. They provide a convenient way for consumers and businesses to access a portfolio of project offsets.

Final buyers

Individuals and organizations purchase carbon offsets for counterbalancing GHG emissions. Therefore, the final buyer has no interest in reselling the offset but will prompt the retirement of the underlying carbon offset.

¹	The Methodologies Panel (Meth Panel) was established to develop recommendations to the Executive Board on guidelines for methodologies for baselines and monitoring plans, and to prepare recommendations on submitted proposals for new baseline and monitoring methodologies.
²	UNEP, November 2007

Published by: WWF Germany

Title: Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards

Authors: Anja Kollmuss (SEI-US), Helge Zink (Tricorona), Clifford Polycarp (SEI-US)

Graphic Design: Tyler Kemp-Benedict

Date: March 2008