the

Clean
Development
Mechanism:

a user’s guide

Energy & Environment Group • Bureau for Development Policy

 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

Copyright 2003

United Nations Development Programme

One United Nations Plaza
New York, NY 10017

Any errors are purely the responsibility of the authors.

The views expressed in this publication do not necesarily represent those of the United Nations or UNDP.
The designations and terminology employed and the presentation of material do not imply any expression
of opinion whatsoever on the part of the United Nations or UNDP.
CONTENTS

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Chapter 1: Furthering Sustainable Development and Emissions Reductions . . . . . . . . . . . .9

Chapter 2: Going through the Project Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Chapter 3: Developing the Project Design Document . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Chapter 4: Streamlined Procedures for Small Scale Projects . . . . . . . . . . . . . . . . . . . . . . .49

Chapter 5: Efficiency, Transaction Costs and Supportive Governance . . . . . . . . . . . . . . . .55

Chapter 6: CDM Transactions: A Review of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69

Chapter 7: The Carbon Offset Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75

Annex I: The Project Design Doument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-2

Annex II: The Gold Standard: Quality Standards for CDM and JI Projects . . . . . . . . . . . .A-11

Annex III: Additional Notes on Baseline Analysis, Leakage and Monitoring . . . . . . . . .A-16

Annex IV: Resources for Further Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-22

Annex V: Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-27

 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

FOREWORD

This manual is designed as a tool to help diverse stakeholders put the Clean Development Mechanism
into action, and to implement projects efficiently and equitably in a variety of national and sectoral con-
texts. Produced by UNDP’s Climate Change Programme, this manual is being field tested in selected client
countries. A primary audience is UNDP’s country offices, which are actively engaged in policy advocacy,
institutional strengthening, and information and knowledge sharing. As national partners of developing
country governments, the country offices are also involved in piloting and testing innovative initiatives,
and in developing the national and institutional capacity for efficient CDM governance and implementa-
tion that will be instrumental to its success.
UNDP’s ability to contribute in this arena relies on the ability of the country offices to successfully
meet the demands of their respective countries. This manual is designed to help them in that regard. The
earlier drafts have benefited from regional discussions with UNDP country offices in Asia Pacific, Latin
America and the Caribbean, Arab states, the Central Africa regions and external resource persons and
stakeholders. We look forward to continued feedback, so that this evolving document can advance the use
of CDM as a voluntary and mutually beneficial resource for meeting the emissions reduction commit-
ments of developed countries while promoting sustainable development in developing countries. More
importantly, UNDP would like to ensure that the CDM projects maintain the integrity of the Kyoto
Protocol. These were the objectives agreed to at the Seventh Conference of Parties to the United Nations
Framework Convention on Climate Change (COP-7) in Marrakech.
The CDM manual is meant to be a living document that will be periodically updated, based in part on
learning from experience, as the rules and regulations relating to the implementation of CDM are
strengthened. It is being presented at this stage as a means of engaging a broader group of experts,
actors and users. We appreciate your continued comments to ensure that we have accurately presented
the attributes and process of CDM and have not overlooked its nuances. In addition to your feedback, les-
sons from UNDP’s field-testing of the CDM manual will contribute towards making it a stronger and more
practical document.
The challenge of addressing global climate change is a lengthy process. The UNFCCC has brought
about an awareness of the necessity to immediately undertake ‘no regrets’ options. With the Kyoto
Protocol coming into force eventually, the global community will have agreed to take the first, and very
initial steps, towards proactively combating climate change. As climate change is an issue of sustainable
development, UNDP intends to remain an engaged stakeholder in the CDM process, with a particular
emphasis on getting the governance issues in the CDM process right and engaging the private sector to
achieve mutually beneficial outcomes that can help alleviate poverty and contribute to sustainable devel-
opment. Ultimately, the CDM process should lead to greater equity and contribute to the progress
towards mobilizing low carbon technology and innovation to combat long-term climate change.

Shoji Nishimoto
Assistant Administrator and Director
Bureau for Development Policy
United Nations Development Programme
2
ACKNOWLEDGEMENTS

This UNDP Clean Development Mechanism manual was a teamwork effort. It was led by Marc Stuart,
Annika Lundgren and Svetlana Morozova from EcoSecurities, Ltd., supported by Arun Kashyap, Khalid Husain
and Vivienne Caballero from the Energy and Environment Group at the Bureau for Development Policy, UNDP.
Ad Dankers (ADventures in Sustainable NRG-Netherlands BV) and Asuka Jusen (Tohoku University, Sendai, Japan)
provided substantive editorial and quality control inputs.

Valuable inputs from various country offices and bureaux at UNDP helped to strengthen the contents and focus of
the document. The document benefited from regional discussions with UNDP country offices from Asia Pacific,
Latin America and the Caribbean, Arab states, the Central Africa regions. We would like to acknowledge the contribu-
tions of colleagues at UNDP, including: Kari Blindheim, Anne-Marie Cunningham, Bethany Donithorn, Sergio Feld,
Ermira Fida, Linda Ghanime, Yoko Hagiwara, Ines Havet, Richard Hosier, Stephanie Hodge, Aminul Islam, Selim Jehan,
Anders Knudby, Susan McDade, Charles McNeill, Leida Mercado, Nandita Mongia, Cielo Morales, Sara Nordstroem,
Frank Pinto, Kamal Rijal, Per Stromberg, Minoru Takada, Alvaro Umana, Jan van den Akker, Jake Werksman.

The following institutions and associated individuals provided valuable time and input for the document:
Jackie Friedenthal (DANIDA), Leslie-Ann Robertson and Jeanne-Marie Huddleston (Department of Foreign Affairs
and International Trade of Canada), Helene Connor (Helio International), Jorgen Villy Fenhann (UNEP), and
Charlotte Streck and Luis Rodrigo (World Bank).

Janet Jensen did the final editing and Mary Zehngut designed the publication.

3
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

ABBREVIATIONS

(see glossary in annex 5 for more details about many of the following terms)

AIJ Activities Implemented Jointly UNDP United Nations Development Programme

BAU Business as Usual UNEP United Nations Environment Programme
CDM Clean Development Mechanism UNFCCC United Nations Framework Convention on
CEF CO2 Emissions Factor Climate Change
CER Certified Emissions Reduction WEHAB Water, Energy, Health, Agriculture and
COP Conference of Parties to the UNFCCC Biodiversity
COP-3 3rd Conference of Parties to the UNFCCC, WWF World Wildlife Fund
(Kyoto, 1997)
COP-7 7th Conference of Parties to the
UNFCCC, (Marrakech, 2001) ENERGY MEASUREMENTS
COP-8 8th Conference of Parties to the
UNFCCC, (Delhi, 2002) k thousand
COP-9 9th Conference of Parties to the UNFCCC, kW kilowatt
(Milan, 2003) M million
COP/MOP Conference of Parties/Meeting of Parties to Mt million tons
the Kyoto Protocol MW megawatt
DNA Designated National Authority t ton
DOE Designated Operational Entity W watt
EIA Environmental Impact Assessment
ER Emissions Reduction
ERPA Emission Reduction Purchase Agreement
EU European Union
FDI Foreign Direct Investment
GEF Global Environment Facility
GHG Greenhouse Gas
GWP Global Warming Potential
IBRD International Bank for Reconstruction and
Development
JI Joint Implementation
LUCF Land-Use Change and Forestry
LULUCF Land Use, Land Use Change and Forestry
MDGs Millennium Development Goals
MOU Memorandum of Understanding
NGO Non-Governmental Organization
ODA Official Development Assistance
PDD Project Design Document
PIN Project Idea Note

4
EXECUTIVE SUMMARY
Of the three flexibility mechanisms in the Kyoto
Protocol designed to engage the marketplace in meeting
the commitments of the developed countries, the Clean
Development Mechanism (Article 12) is the only one
that involves developing countries. The CDM aims to
direct private sector investment into emissions-reduc-
tion projects in developing countries while promoting
sustainable development in these countries. In return,
the industrialized countries investing in projects will
receive credits against their Kyoto targets. Kyoto Parties
with emission targets for 2008-2012 are eligible to apply
certified emission reduction units from CDM-funded
emission reductions towards meeting their target in
and after 2000. An important outcome of the Eighth
Conference of the Parties (COP-8, 2002) was to make the
Kyoto Protocol's CDM fully operational. The decision
also adopted the simplified modalities and procedures
for small-scale CDM project activities and paved the way
for possible early approval of CDM activities.
This manual is intended to be a reference tool for
UNDP country officers so that they can assist national
public and private stakeholders in implementing activi-
ties under the CDM. Those stakeholders potentially
include government negotiators, designated national
authorities, in-country government agencies in the
fields of environment, energy, development and
finance, local project developers, relevant NGOs, local
financial institutions, technology vendors and consult-
ants and operational entities.
The manual is not meant to – and cannot – replace
the direct expertise that is required to identify, engage
and execute project finance and emission transaction
contracts under the CDM. Rather, it is intended to pro-
vide a holistic overview of the emergent CDM process
and the many supportive functions that are required
for its success. Engagement is the key to successfully
using this tool. UNDP seeks to have its country officers
understand client country strengths and weaknesses
and to orient its efforts to shore up areas of identified
shortfall to ensure that CDM is implemented efficiently,
transparently and equitably through negotiations
between developing countries, developed countries and
the private sector as equal partners.
The CDM is unique in that the commodity it delivers –
greenhouse gas emission reductions – requires no physi-
cal infrastructure for placement into international mar-
kets. Thus, if transaction costs and other barriers can be
minimized, it is theoretically possible for even small-scale
development projects to enhance revenue flow to develop-
ing countries via the emerging market for greenhouse gas
reductions.
UNDP promotes the human, institutional and sys-
tem-wide capacity development component of the CDM
and works to bring the financial and technological
benefits of the CDM to less advantaged participants.
UNDP, as a knowledge-based capacity development and
facilitating agent, can use its expertise to:
■ Identify demand-based national CDM capacity devel-
opment needs and work with private sector entrepre-
neurs, host country governments and the civil socie-
ty to create an effective and efficient enabling envi-
ronment and a CDM management regime that not
only reduces transaction costs but also assists the
developing countries achieve sustainable develop-
ment as an intrinsic component of their national
development priorities.
■ Identify types of CDM projects including small scale
projects that may be appropriate within different
country contexts;
■ Give project developers and host governments
realistic assessments of the external market situation
and CDM transaction structures;
■ Identify in-country groups that may be able to
provide services to CDM projects;
■ Help project developers understand CDM transaction
modalities;
■ Assist governments prioritize project types in view of
their particular sustainable development criteria and
5
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
establish internal policies to facilitate their develop-
ment; and
■ Help governments establish internal check and bal-
ance systems for regulating and promoting CDM proj-
ects and ensuring that they support sustainable
development aims.
There is currently no single model for successfully
operationalizing the CDM and probably never will be.
UNDP country officers will encounter a wide range of
situations in engaging with CDM participants. The key
to success will be to listen to this client base, efficiently
disseminate important information to stakeholders and
act as a de facto neutral clearinghouse for information
and knowledge that strengthens national capacity to
effectively participate in the opportunities afforded by
the CDM. While some country officers will spend the
majority of their early stage efforts with the project
development community, others will be more engaged
with the governmental process and work with local
NGOs that seek to ensure that their voices are heard.
It is expected that over the coming years, UNDP will
make ongoing efforts to document successes – and lessons
learned – in the implementation of the CDM across vari-
ous countries. This will, over time, add a real ‘learning by
doing’ context to this manual. As this manual represents
only the first iteration of work-in-progress, subsequent
versions will necessarily incorporate future policy devel-
opments and market trends and add to the guidance pro-
vided here. This manual is, therefore, the first step in an
on-going process to establish a common understanding of
CDM procedures and experiences.
The manual begins with background information
about the CDM’s evolution and objectives, and a discus-
sion of UNDP’s role in building the kinds of human,
institutional and system-wide capacity that will make it
a success. Chapter 1 also considers how climate change
is linked to sustainable development, discusses lessons
learned in the course of implementing similar projects,
and outlines the need for capacity strengthening and the
forms of enabling governance that will be needed to
make the CDM a success. The chapter concludes with a
discussion of some of the more controversial aspects of
the mechanism, and how these are being resolved.
6
Chapter 2 presents the CDM participants and proj-
ect types. It then walks the reader through the entire
CDM cycle, from a preliminary checklist of eligibility
factors through to the process of validation and regis-
tration of CERs. Most UNDP interactions in developing
capacity for CDM market interaction will have to do
with the project components described in the chapter,
including technical analysis, documentation require-
ments and the need to successfully interact with stake-
holders and regulators at both the domestic and inter-
national level.
Success in steering a project through the CDM
process hinges largely on developing a clear, accurate
and comprehensive project design document, or PDD.
This is the key document that the host country,
investors, stakeholders (local, national and internation-
al) and designated operational entities will use to eval-
uate the project’s potential and judge its merit. Indeed,
no project can earn CERs without the development, val-
idation and Executive Board acceptance of a project
design document. Because the Kyoto Protocol specifies
that CDM projects must contribute to greenhouse gas
emission reduction that are additional to what would
have occurred in their absence, a critical element of the
project design document is development of the baseline
scenario for use in assessing this key issue. Chapter 3
discusses the project design document, paying particu-
lar attention to the technically complex issue of devel-
oping a credible baseline and using it to establish the
project’s additionality. This last issue is also discussed
in annex 3.
Contributions to sustainable development in the
host country are a primary product of CDM projects.
The definition of sustainable development and how
CDM projects should contribute to it is considered the
host country’s prerogative. The CDM is potentially a
way to foster rural development in host countries by
directing investments in appropriate energy technolo-
gies through small-scale projects to people living in
rural communities. However, its potential in this
regard could be undermined by the high transaction
costs associated with small-scale and community-based
development projects relative to the likely return on
investments. Chapter 4 discusses strategies and simpli-
fied procedures that could reduce the transaction costs
for smaller projects.
Precisely because so much is at stake – not only
investments, but also the development paths of many
countries and the world’s ability to effectively address
climate change – many safeguards and checks have
been built into the CDM project cycle. The objective is
to make the CDM live up to its promise. One result,
however, is a complex and expensive approval process
that can moderate the degree of utilization of CDM. The
costs of implementing CDM projects will likely decrease
over time as a result of learning and ‘learning by shar-
ing’ effects. However, several institutional arrange-
ments can keep CDM transaction costs down even in the
early stages of its implementation. Chapter 5 first pro-
vides an introduction to transaction costs and their
implications on project feasibility. It then examines
ways in which the CDM can be efficiently managed by
host country governments, if capacity in the area of
governance can be strengthened.
The CDM’s dual goals of yielding sustainable devel-
opment benefits while creating low-cost greenhouse gas
emission reductions can be achieved only via carefully
structured contracts. Although all contracts can be com-
plicated, CDM transactions offer particular challenges,
as the parties often have very different business and
cultural perspectives. Carbon trading can be extremely
complex and has the potential to impact development
trajectories in ways that may be unforeseen and unin-
tended. Shortfalls in analytical and negotiating capaci-
ty in developing countries relative to their industrial-
ized country counterparts create a very real possibility
that poorer developing countries will not be able to
negotiate as equal partners. Purchasers of CERs will
often be large, sophisticated multinationals with signif-
icant experience in project finance, commodity and
derivative transactions. While some CER sellers will be
multinationals as well, the sustainable development
component of the CDM means local energy developers,
community groups and even NGOs may end up as count-
er-parties. In order to successfully execute a CDM trans-
action, the buyer and seller need to reach agreement on
an appropriate structure for the transaction, and an
appropriate contract for the transaction. Chapter 6
examines various ways of structuring suitable CDM
transactions.
International agreements designed to combat cli-
mate change, including the CDM, have effectively creat-
ed a new ‘commodity’ in international trade – one that
will increasingly be produced in the global South and
consumed by richer, more industrialized countries.
International trade in this new commodity of carbon
offsets has already begun to develop as countries and
companies seek to meet international agreements.
Chapter 7 describes the evolving market for CERs in
terms estimated market size, prices and buyers.
The manual concludes with the following informa-
tional annexes:
Annex 1: The Project Design Document
Annex 2: Gold Standard: Quality Standards for CDM
and JI Projects
Annex 3: Additional Notes on Baseline Analysis,
Leakage and Monitoring
Annex 4: Resources for Further Information
Annex 5: Glossary
7
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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

CHAPTER 1:

Furthering Sustainable Development

and Emissions Reductions

This chapter provides background information about the Clean Development

Mechanism’s evolution and objectives, as well as about UNDP’s role in building
the kinds of human and institutional capacity that will make it a success.
The chapter addresses:

CLIMATE CHANGE AND Box 1.1: The CDM in brief

SUSTAINABLE DEVELOPMENT Box 1.2: Status of the Kyoto Protocol
Box 1.3: Learning-by-doing
OPERATIONALIZING THE CDM
capacity development
WHAT UNDP HAS LEARNED Box 1.4: Greenhouse gases
addressed by the CDM
UNDP’S APPROACH TO CAPACITY BUILDING

KNOWLEDGE SHARING

RESERVATIONS AND RESPONSES TO THE CDM

■ Common but differentiated responsibilities
■ Emissions reductions trading
■ Sovereignty issues
■ Exhausting inexpensive reduction options
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

10
CHAPTER 1: FURTHERING SUSTAINABLE DEVELOPMENT
AND EMISSIONS REDUCTIONS

Adopted at the Third Conference of Parties (COP-3) to
the United Nations Convention on Climate Change, the
Clean Development Mechanism is an emissions trading
mechanism designed to simultaneously benefit develop-
ing and industrialized countries. The CDM is the only
flexibility mechanism created by the Kyoto Protocol
that involves developing countries. Innovative and com-
plex, the mechanism is designed to stimulate emission
reductions in the developing countries, while also pro-
moting sustainable development. Ideally, it will encour-
age additional capital flows into developing countries,
accelerate technology transfer, and enable developing
countries to leapfrog to cleaner technologies. At the
same time, it is intended to help developed countries
achieve their emission reduction commitments at a
lower cost than would otherwise be possible. Whether
or not the CDM achieves these aims will depend to a
great extent on the ability of project developers, host
countries and other stakeholders to implement it effi-
ciently, and in ways that promote social, economic and
environmental objectives and maintain the integrity of
the Kyoto Protocol. This chapter describes the CDM’s
evolution and objectives, and discusses UNDP’s role in
building the kinds of human and institutional capacity
that will make it a success.
CLIMATE CHANGE AND SUSTAINABLE DEVELOPMENT
Climate change is one of UNDP’s priority areas. For
UNDP, climate change is not simply an environmental
issue. Rather, it is a part of the larger challenge of sus-

BOX 1.1: THE CDM IN BRIEF

The CDM has two primary goals:
■ To assist Annex I countries in reaching their emission reduction targets, and;
■ To promote sustainable development objectives in the host countries (non-Annex I countries).
The first goal allows developed countries to achieve part of their reduction obligations through projects in developing
countries that reduce emissions through clean energy, energy efficiency and renewable energy projects or sequester CO2 from
the atmosphere in the form of biomass through reforestation or afforestation.
The mains characteristics of the CDM are:
■ Participation in a CDM project activity is voluntary and CDM investments will be market driven. Public and private parties
are eligible to participate.
■ CDM activities must lead to measurable reductions in emissions, which will be transferable to the investor in the form of
certified emission reductions, or CERs, upon quantification and certification by a third party.
■ The reduction in emissions must be additional to any that would occur in the absence of the approved project activity. In
order to earn CERs, emissions reductions must be quantified and certified by a third party.
■ Contributions to sustainable development in the host country are a primary aim of CDM projects. The definition of
sustainable development or how CDM projects should contribute to it is considered to be the host country’s prerogative.
The CDM allows transfer of CERs to a parties investing in such projects. This market-based system will allow
individual firms, as well as countries, to select the most cost-effective solutions to mitigating greenhouse gas emissions.
The Marrakech Accords, agreed upon at COP-7 in 2001, established a CDM Executive Board and recognized that CERs
achieved in the CDM host developing countries can accrue from emissions reductions activities undertaken since 2000.
The developed countries in turn can use these to fulfil their emissions reductions commitments in the first commitment
period (2008-2012).

11
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

tainable development. It is also one of the most serious
threats to poverty eradication. In 2000, in committing
themselves to the Millennium Declaration, the world’s
leaders resolved to improve the quality of life of poor
people through the achievement of global development
objectives. Of the eight fundamental Millennium
Development Goals, foremost is the commitment of
189 nations to reduce by half the proportion of people
living in abject poverty by 2015. The Millennium
Development Goals recognize the fundamental connec-
tion between energy, environment and sustainable
development. Similarly the Delhi Declaration on cli-
mate change and sustainable development (agreed to at
the Eighth Conference of the Parties to the UNFCCC in
2002) highlights the principle of common but differen-
tiated responsibilities of countries to address climate
change, reaffirms development and poverty eradication
as overriding priorities in developing countries and
emphasizes the integration of climate change objectives
into national sustainable development strategies.
UNDP has adopted a strategic approach to sustain-
able development proposed by the UN Secretary General
that emphasizes action in five key thematic areas:
water, energy, health, agriculture and biodiversity (col-
lectively called WEHAB). Climate change is recognized
as a cross-cutting issue that impacts all of the five
WEHAB areas, one that is integral to a coherent
approach to sustainable development. Thus, addressing
climate change should be integrated into national
strategies for poverty eradication. In theory, CDM can
assist in accomplishing this objective through partner-
ships with diverse stakeholders and innovative policy
formulation and implementation. This will require
increased human, institutional and system-wide capaci-
ty at the national level and enabling policies, laws and
regulations in the host countries.
OPERATIONALIZING THE CDM
An important outcome of COP-8 (Delhi, 2002) was to
enact many decisions to make the CDM fully opera-
tional. At that meeting, simplified modalities and
procedures for small-scale CDM project activities were
also adopted (see chapter 4).
Participation in a CDM project activity is voluntary
and investments in CDM will be market driven. While
both public and private entities are eligible to partici-
pate in CDM, investments are likely to be private sector
driven. CDM activities must lead to quantified reduc-
tions in emissions, which will be transferable to the
investor in the form of CERs, a marketable commodity
in the carbon market under the Kyoto Protocol.
Contributions to sustainable development shall be a

BOX 1.2: STATUS OF THE KYOTO PROTOCOL

Despite the fact that more than 100 countries have already ratified it, the Kyoto Protocol still had not come into force as this
publication was going to press.
The environmental treaty sets individual targets for industrialized countries to lower their emissions of carbon gases, on
average by 5.2 per cent below their 1990 levels, over the next 10 years. It suffered a serious setback in 2001 when the United
States, which alone accounts for around 35 per cent of the world's greenhouse emissions, pulled out of the treaty.
Under the Kyoto Protocol’s complex weighting system, 55 Parties to the Convention should ratify the Protocol including
Annex I Parties that were responsible for producing 55 percent of that group’s carbon dioxide emissions in 1990, before it
comes into force. With the decision of the US to pull out of the treaty, Russia’s ratification is required to put the protocol into
force.
At the opening of a five-day World Climate Change Conference in Moscow in September 2003, Russian President Vladimir
Putin officially postponed a decision on the country’s ratification of the Protocol. He said his country agrees in principle to the
treaty, but wants more time to study the plan.

12
 CHAPTER 1: FURTHERING SUSTAINABLE DEVELOPMENT AND EMISSIONS REDUCTIONS
For UNDP, climate change is not simply
an environmental issue. Rather, it is a
part of the larger challenge of sustainable
development.
.
primary product of CDM projects in the host countries.
The definition of sustainable development or how CDM
projects should contribute to it is considered the host
country’s prerogative.
CDM promises to generate additional resources for
investment in renewable energy, energy efficiency and
other projects to reduce greenhouse gas emissions in the
South. Although it will not solve all development prob-
lems of host countries, CDM can potentially influence
investments, technology and economic growth.
However, the non-Annex I countries differ widely in
terms of national capacities to utilize technology, access
finance and efficiently implement CDM activities.
The knowledge base to deal with the complexities of
CDM is rapidly increasing and serious efforts are being
made by the CDM Executive Board to make the final
architecture coherent and efficient. There appears to be
a high demand from the developing countries for initi-
ating CDM transactions. Their successful implementa-
tion, however, will depend on the presentation of viable
projects capable of attracting foreign investments and
on the assurance of efficient transactions. This, in
turn, will demand clearly defined sustainable develop-
ment priorities by host countries, as well as the institu-
tional capacity and system-wide support to make the
project approval process transparent, fair and efficient.
CDM outcomes must be evaluated from a long-term
equity1 perspective, that is, by considering how these
projects can create capacity for implementation of miti-
gation activities and increase the number of win-win
options that will result in a high-growth, low-carbon
trajectory within the financial, institutional, and tech-
nological reach of host countries. Strengthening broad-
based capacity that fully integrates equity concerns into
the CDM will foster the ability of host countries to even-
1
Equity does not imply equality; it entails the existence of an equal opportunity to access resources available under CDM.
2
A pilot programme established by the UNFCCC in 1992, AIJ allowed private entities in one country to reduce, sequester, or avoid emissions through a project in a different country.
During the AIJ Pilot Phase, projects were conducted with the objective of establishing protocols and experiences, but without allowing carbon credits to be transferred between
developed and developing countries.
tually undertake emissions reductions of the magnitude
that will be required globally, while maintaining their
commitment to sustainable development. The key to
this is long-term thinking.
WHAT UNDP HAS LEARNED
Until the carbon market evolves sufficiently, the pri-
vate sector is likely to focus on ‘straightforward’ CDM
projects that are commercially viable on their own, with
the resulting CERs providing an incremental benefit.
UNDP’s experience from the country level informs us
that while a high internal rate of return is necessary, it
is not a sufficient condition for attracting private sector
investment. Even though a number of projects analyzed
by UNDP in cooperation with host countries had a sig-
nificantly high internal rate of return, they did not
attract investors. Non-economic project barriers –
including inadequate human capacity, policies, institu-
tions, legal frameworks, and add a lack of innovative,
development-oriented financial institutions – were
major constraints to attracting foreign investment.
Similarly, learning from the pilot phase of Activities
Implemented Jointly2 highlights the critical importance
of adequate human, institutional and systemic capacity,
an enabling environment and access to knowledge and
information by the host countries for its success. AIJ
projects were concentrated in countries and regions
that had targeted policies, adequate capacity to under-
take and implement projects, and actively encouraged
stakeholders’ participation. Also ‘learning-by-doing’
capacity development was found to be an important
component in the success of the projects undertaken.
Low and fragmented skill levels in developing coun-
tries constrain internal responses to climate change
challenges within the framework of sustainable devel-
opment. In order for the host countries to fully embrace
CDM as a tool for sustainable development, they must
be empowered to be equal partners in negotiations with
the developed countries and private sector. A critical
element of the solution lies in capacity development
and institutional strengthening to address limitations
13
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

BOX 1.3: LEARNING-BY-DOING CAPACITY DEVELOPMENT

The ‘learning–by-doing’ strategy to capacity development is a solution-oriented approach grounded in investment and project
appraisal in the real world, while taking into account host country needs and concerns. It involves identifying a private sector
entrepreneur from an industrial sector, one who is amenable to sharing his or her learning, and taking the entrepreneur through
the project cycle, thereby decreasing transaction costs and developing capacity through hands-on tangible activities.
An important output of this strategy is an investment-grade project design document that can be taken by the host
country project developers to the potential investors. While only one entrepreneur is identified for designing the project
document, the gains of greater capacity are visible across the sector essentially because of the ‘learning by sharing’ activi-
ties involving entrepreneurs throughout the sector. The strategy successfully involves diverse stakeholders including the
government and civil society who gain an understanding of mutual needs and responsibilities. The result is greater trans-
parency of actions and participation.
CDM capacity development also needs to focus on creating in the host country an effective and efficient enabling environ-
ment and CDM management that not only reduces transaction costs but also assists the developing country in advancing its
national development priorities. Even if a host country has many attractive CDM project opportunities, it will not necessarily
mean that many projects will actually be implemented. An effective national institutional structure is necessary to attract
investors and harness the CDM’s potential. Host countries should develop a clear understanding about the approval criteria and
sectoral as well as technological priorities. The institutional and regulatory framework should be set up with an emphasis on the
competitive nature of the CDM. The CDM regulatory and outreach function also should be designed to avoid any conflict of
interest. It will be beneficial for countries with multi-tiered political structures to have creative and participatory processes to
keep all stakeholders well informed and avoid inefficiencies in the approval structure.

in the CDM implementation resulting from weak
administrative structures. Ideally, this will lead to
transparent, efficiently administered policies, laws and
regulations, and to the accountability and participation
of diverse stakeholders.
Lessons from UNDP’s country level activities in the
pilot phase also suggested that in the absence of effec-
tive host country capacity to competently address issues
relating to project approval, coherently articulated
national, sectoral and technological priorities and
transparently defined sustainable development criteria,
CDM processes will incur prohibitive transaction costs.
These issues constitute, inter alia, the primary responsi-
bility of the host country’s designated national authori-
ty, in accordance with the participation requirements
under CDM rules.
UNDP’S APPROACH TO BUILDING CAPACITY
As the lead agency for capacity building for sustainable
development, UNDP has a specific contribution to make
in the overall response of the United Nations system
and in assisting developing countries to implement the
UNFCCC and the Kyoto Protocol. UNDP’s integrated
approach to national development – with a focus on
creating an enabling policy environment and strength-
ening human and institutional capacities through a
learning-by-doing strategy – is suited to overcoming
barriers to CDM’s success.
UNDP has already analyzed several small-scale
UNDP-GEF projects to determine their potential
for viable CDM operations. It recommends taking
completed UNDP-GEF projects and GEF’s Small Grants
Programme projects to scale as a way to increase
capacity through practical experience. In keeping with
UNDP’s focus on promoting greater project level and
geographical equity in the implementation of CDM,
many of these projects could be included in a portfolio
approach that will focus on disadvantaged countries
and, as relevant, on smaller projects.

14
 CHAPTER 1: FURTHERING SUSTAINABLE DEVELOPMENT AND EMISSIONS REDUCTIONS

KNOWLEDGE SHARING entrepreneurs, host country governments and the

UNDP promotes the sustainable development compo-
nent of the CDM and works to bring the financial and
technological benefits of the CDM to less advantaged
participants. UNDP, as a knowledge based facilitating
agent, can assist the host countries to:
■ Identify demand-based national CDM capacity
development needs and work with private sector
civil society to create an effective and efficient
enabling environment and a CDM management
regime that not only reduces transaction costs but
also assists the developing country in achieving
sustainable development as an intrinsic compo-
nent of its national development priorities.
■ Identify types of CDM projects, including small-

BOX 1.4: GREENHOUSE GASES ADDRESSED BY THE CDM

The Kyoto Protocol addresses mitigation of the six gases believed to be the main contributors to the climate change effect,
which is associated with an increase in the global temperature and disturbed climatic patterns. The relative impact caused by
the release of greenhouse gases into the atmosphere is measured by the global warming potential or GWP. Global warming
potential is an index defined as the cumulative radiative forcing between the present and some chosen time horizon caused
by a unit mass of gas emitted now, expressed relative to a reference gas such as carbon dioxide. The Intergovernmental Panel
on Climate Change is responsible for setting and adjusting the indices based on the most current scientific knowledge.
For instance, in the Second Assessment Report of the IPCC, methane has a radiative forcing that was estimated to be about
21 times greater than that of CO2, thus it has a GWP of 21.
The three greenhouse gases most frequently found in nature are:
■ Carbon dioxide (CO2) – a naturally occurring gas released as a by-product of fossil fuel combustion, selected industrial
processes and changes in the patterns of land-use, particularly deforestation. In terms of gross volume of emissions, it is
by far the most important greenhouse gas. Carbon dioxide is given the base global warming potential value, 1.
■ Methane (CH4) – a gas released in coal mining, landfill operations, livestock raising and natural gas/oil drilling (among other
processes). Methane has a global warming potential of 21 (in other words, it is 21 times more potent in terms of global
warming effect than carbon dioxide).
■ Nitrous oxide (N2O) – a gas emitted during fertilizer manufacturing and fossil fuel combustion. The transportation sector is
usually a significant contributor to N2O emissions. N2O has a global warming potential of 310.
Human activity clearly contributes to the increased concentrations of CO2, CH4 and N2O in the atmosphere, but they can
also be released through natural processes. It is expected that the vast majority of CDM projects will involved these gases.
In addition to these three greenhouse gases, there are three additional classes of engineered gases, which occur on a very
limited basis in nature.
■ Hydrofluorocarbons (HFCs) – a group of gasses emitted in selected manufacturing processes and frequently used in refriger-
ation and air conditioning equipment. HFC-23, HFC-12, HFC-134a and HFC 152a have global warming potentials of 11,700,
2800, 1300 and 140 respectively.
■ Perfluorocarbons (PFCs) – similar to HFCs, PFCs were developed and introduced as an alternative to ozone depleting CFCs
and HCFCs. They are emitted in a variety of manufacturing processes. Their global warming potential ranges from 6.500 for
CF4 to 9,200 for C2F6.
■ Sulphur hexofluoride (SF) – the most potent greenhouse gas, released in a very limited number of manufacturing processes
where it is used as a dielectric fluid. The global warming potential of SF6 is equal to 23,900, and one molecule of SF6 has the
atmospheric lifetime of 3,200 years. Hence, SF6 represent the most dangerous group of anthropogenic-induced greenhouse
gas emissions.
As of October 2003, there has been only one project undertaken in Korea involving the destruction of the engineered gases.
Though the impact from such projects could be significant, they are not expected to constitute a large share of CDM projects.

15
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
scale projects, that may be appropriate within
different country contexts;
■ Give project developers and host governments
realistic assessments of the external market situa-
tion and CDM transaction structures;
■ Identify in-country groups that may be able to
provide services to CDM projects;
■ Help project developers understand CDM transac-
tion modalities;
■ Assist governments prioritize project types in
view of their particular sustainable development
criteria and establish internal policies to facilitate
their development; and
■ Help government establish internal checks and
balance systems for regulating and promoting
CDM projects and ensuring that they support sus-
tainable development aims.
There is currently no single model for successfully
operationalizing the CDM and probably never will be.
UNDP country officers will encounter a wide range of
situations in engaging with CDM participants. The key
to success will be to listen to this client base, efficiently
disseminate important information to stakeholders and
act as a de facto neutral clearinghouse for information
that impacts national capacity to fully participate in
the opportunities afforded by the CDM. While some
country officers will spend the majority of their early
stage efforts with the project development community,
others will be more engaged with the governmental
process and work with local NGOs to ensure that their
voices are heard.
It is expected that over the coming years, UNDP will
make ongoing efforts to document successes – and les-
sons learned – in the implementation of the CDM across
various countries. This will, over time, add a real
‘learning by doing’ context to this manual. As this rep-
resents only a first iteration of work-in-progress, subse-
quent versions will necessarily incorporate future poli-
cy developments and market trends and add to the
guidance provided here.3 This manual is, therefore, the
first step in an on-going process to establish a common
understanding of CDM procedures and experiences.
3 A review of three UNDP/GEF biomethanation and landfill gas projects in Jordan, China and India is currently being undertaken. Their high cost-effectiveness makes them good
potential candidates as CDM projects. This study will form an annex to the CDM manual and will be included in subsequent versions.
16
RESERVATIONS AND RESPONSES TO THE CDM
Whether the CDM is the most effective and equitable
way to reduce the impact of climate change has been
debated by governments, the private sector and NGOs
since the concept was first conceived. It has taken the
better part of a decade to negotiate the terms by which
the CDM should operate. Among the difficult negotia-
tions were those concerning the allocation of required
emission reductions, responsibilities of non-Annex I
countries, future obligations and equity issues. Over
time the Conference of the Parties and other stakehold-
ers have worked to try and address these major con-
cerns. Some of the key issues that were hotly debated
are discussed below.
Common but differentiated responsibilities
One issue has to do with what the Kyoto Protocol terms
‘the common but differentiated’ responsibilities that
should be borne by industrialized and developing coun-
tries. The OECD countries are undeniably responsible for
a disproportionate amount of the buildup of atmospheric
greenhouse gasses implicated in climate change. This
buildup began with dawn of the industrial revolution
some 150 years ago. Developing countries have con-
tributed less than one-third of the CO2 and CH4 accumu-
lated in the atmosphere and less that 20 per cent of all
industrial CO2 emissions, Accordingly, there is no
requirement that developing countries participate in the
CDM or engage in emission reductions. They are free to
use the CDM – or not – as they engage in their own sus-
tainable development priorities or emissions reductions.
Emissions reductions trading
Another issue is whether the CDM shifts the economic
‘burden’ of emission reductions from those who are
responsible – industrialized countries – to the develop-
ing countries. Developing countries are most vulnerable
to climate change and can least afford to pay for emis-
sion reducing technologies, measures to adapt to cli-
mate change and for the presumed problems that cli-
mate change will create. Does the CDM effectively insist
that developing countries help the industrial world out
of this mess by providing cost competitive emission
reductions?
 CHAPTER 1: FURTHERING SUSTAINABLE DEVELOPMENT AND EMISSIONS REDUCTIONS
When its rules were being negotiated it became
clear that the only way for the Kyoto Protocol to suc-
ceed was if it established reduction targets that were
both possible to reach yet stringent enough to make a
difference. The economic dislocation and inefficiency
that would likely result from meeting emission commit-
ments without being able to use the most cost effective
options were in no one’s interest. The notion of coun-
tries trading emission rights and emission reductions
first emerged in the text of the original Framework
Convention of Climate Change as a way to bring greater
economic efficiency to the task of lowering emissions
globally. There is little doubt that during the first com-
mitments period, Annex I countries and industries will
take advantage of the CDM to cushion the economic
impact of their newly carbon-constrained economies.
The transition to a less greenhouse gas intensive econo-
my is a long-term process and emissions trading is one
of many tools that should be employed to minimize
global economic impacts and enable developing coun-
tries to promote their economic growth in a sustainable
manner. The CDM can, in principle, be a win-win solu-
tion – a facilitating instrument to provide capital and
technology flows (that may otherwise not occur) to
developing countries, while keeping the overall basis of
the global economy flowing smoothly.
Sovereignty issues
Another contentious issue was whether the CDM would
diminish national sovereignty by allowing external
forces to change the development paths of the host
countries. This issue is particularly acute with regard to
the land-use component of the CDM. This raised heated
debate during the time that international forest conser-
vation was being considered as a tool to combat climate
change. The debate arose from the fact that some of the
earliest projects undertaken as Activities Implemented
Jointly in the early 1990’s were based on forest conser-
vation. Many of these projects made extravagant claims
about the carbon savings attributable to their imple-
mentation. A fear emerged that with large expanses of
undeveloped forest in the major tropical countries
worth just dollars per hectare on the open market in
many cases, Western multinationals would purchase
land in vast scale and set up private ‘reserves’. This
action – if taken on the basis of carbon sequestration –
would undermine the rights of sovereign countries and
local inhabitants to manage their own resource base,
while also allowing multinationals to continue along a
path of excessive emissions at a small cost.
However, since the CDM process now excludes
‘avoided deforestation’ in the trading regime, the objec-
tion is less pertinent. Furthermore, the ‘free for all’
that characterized earlier transactions has been
reduced by rigorous standards mandated by the CDM
process cycle. With the requirement for host country
endorsement, inclusion of sustainable development cri-
teria based on the host country’s prerogative, the use of
third party validators, and the requisite local and inter-
national stakeholders consultations, the CDM process
provides extraordinary –- accountability. This helps
ensure that the eventual investments focus not only on
cost-effectiveness, but also on the contribution of CDM
projects to sustainable development priorities.
Exhausting inexpensive reduction options
Lastly, it was feared that the CDM would exhaust all
inexpensive reduction opportunities in the host coun-
tries, leaving them with very high-cost emission abate-
ment projects at the point when the countries are
required – or opt – to take on an emissions cap during
future iterations of the UNFCCC. Observers have voiced
concern that once emissions reductions credits are trans-
ferred from a developing country project to an industrial
country they will no longer be available for the use by
the host country in meeting its own commitments.
However, several factors alleviate this concern. First
of all, CDM projects can receive credit for 10 or 21 years
(including baseline reassessments after year 7 and 14),
meaning that any emission performance that occurs
after the period of the CDM contract will be a compo-
nent of the country’s emission inventory. Second, a
variety of contractual structures are available under
which a developing country can protect its emission
reduction credits, including revisiting terms of the
transaction if and when the country’s emissions are
capped. Most importantly, CDM is a voluntary activity
that host countries have considerable control over.
17
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

18
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

CHAPTER 2:

Going through the CDM Process

This chapter presents the basic elements one needs to understand in order to put the CDM
into practice: the key participants, project types and the process. To actually receive credit
for emissions reductions, potential CDM developers must follow the steps in this chapter.
Preparation of the project design document, a critical part of the process, is examined in
more detail in chapter 3. Chapter 2 covers:

CDM PARTICIPANTS THE PROJECT CYCLE

■ Project developers/operators ■ Project identification
■ CDM investors/CER purchasers ■ Project idea note
■ Host governments and designated ■ Project design document
national authorities ■ Stakeholder participation
■ Designated operational entities ■ Host country approval
■ The CDM Executive Board ■ Validation by a designated operational entity
■ Other stakeholders ■ Registration
■ Implementation and monitoring
PROJECT TYPES ■ Verification
■ Energy efficiency projects ■ Certification and issuance of credits
■ Methane recovery
■ Industrial process changes Figure 2.1: A simplified CDM project flow
■ Cogeneration Box 2.1: Land use and land-use changes
■ Transport Box 2.2: Official development assistance
■ Agricultural sector and CDM projects
■ Land use Box 2.3: Eligibility Exercise
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
CHAPTER 2: GOING THROUGH THE CDM PROCESS
The CDM is a novel mechanism, one that can potential-
ly redirect the flow of investments to a variety of dif-
ferent projects, from major transportation initiatives to
energy conservation measures to small-scale solar home
systems. To ensure that the CDM accomplishes the
important goals it is intended to fulfill, numerous safe-
guards and checks have been included in the rules of its
implementation, and many participants will have a say
in the process.
This chapter describes the CDM participants, project
types and project cycle. It is the key process oriented
document in this manual. Most UNDP interactions in
developing capacity for CDM market interaction will
have to do with the project components described here,
including key issues of project development, technical
analysis needs, documentation requirements and the
need to successfully interact with regulators at both the
domestic and international level. Chapter 2 walks the
reader through the building blocks of a CDM project,
from the early stages of defining a project to getting to
the point of trading certified emission reductions, or
CERs, in the international market.
All projects that aim to generate CERs under the CDM
rules must meet the essentially the same criteria and
complete the same steps. This process is commonly
known as the CDM project cycle. However, in order to
reduce the relative transaction costs associated with the
CDM, streamlined procedures and standardized baselines
for small-scale projects have been approved by the CDM
Executive Board. Measures to simplify the CDM process
for smaller-scale projects are discussed in chapter 4.
CDM PARTICIPANTS
Every CDM projects involves a standard set of key
participants. While the range and types of stakeholders
may vary from project to project, the following
discussion describes the key participants with
specific roles in all projects:
Project developer/operators
The following types of organizations can develop
20
and operate CDM projects
■ Governmental bodies (usually, departments of
government)
■ Municipalities
■ Foundations
■ Financial institutions
■ Private sector companies
■ NGOs
CDM investors/CER purchasers
An investor is an entity that purchases CERs from a
CDM project. The investor is usually from an Annex I
country and can be a corporation, a government body
or non-governmental organization. The evolving mar-
ketplace for CERs is described in chapter 7.
Host governments and designated national authorities
The Marrakech Accords state that in order to partici-
pate in the CDM, a country needs to be a Party (signed
and ratified) to the Kyoto Protocol. CDM host countries
also have to specify a domestic institutional body – a
designated national authority or DNA –for approving
CDM projects. The host country – via the designated
national authority – must approve each CDM project
and ensure that it conforms to their sustainable devel-
opment criteria. Chapter 5 discusses the regulatory and
promotional functions of the host country.
Designated operational entities
Designated operational entities, or DOEs, are domestic
or international legal entities that have been accredited
by the CDM Executive Board. They are responsible for
significant stages of the CDM project development
process. The responsibilities include:
■ Validation of CDM activities at the outset of the project;
■ Making publicly available CDM project design
documents
■ Receiving public comments on the CDM documents
■ Incorporating stakeholder comments
■ Verification and certification of CERs during the
operation of the project;
The same designated operational entity can
carry out both the validation (at project outset) and
 CHAPTER 2: GOING THROUGH THE CDM PROCESS

FIGURE 2.1: A SIMPLIFIED CDM PROJECT FLOW

21
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
verification (during project operation) only if a specific
request is made to the CDM Executive Board. Although
this is allowed under the rules of the Marrakech
Accords, it can result in conflicts of interest, and
should therefore be considered carefully.
The CDM Executive Board
The CDM Executive Board supervises the CDM and
reports directly to the Conference of Parties to the
UNFCCC /the Meeting of Parties to the Kyoto Protocol
(COP/MOP). The Executive Board was elected at COP-7
and has ten members representing both industrialized
and developing countries. The Executive Board is
responsible for:
■ Making recommendations to the COP/MOP on
amendments as well as on further modalities and
procedures for the CDM;
■ Approving new methodologies related to baselines,
monitoring plans and project boundaries;
■ Reviewing simplified procedures and definition of
small-scale projects and report to COP/MOP;
■ Accrediting and suspending of operational entities;
■ Reviewing accreditation procedures;
■ Making publicly available proposed CDM activities
and all procedures for developing a CDM project;
■ Developing and maintaining a CDM project registry;
■ Reviewing project validation and verification
reports; and
■ Issuing verified CERs.
Other stakeholders
The CDM process cycle calls for two rounds of stakehold-
er comments. Developers must invite local constituen-
cies who will be affected by a project to review and
comment on the project design document before it is
submitted for host country approval. Later, subsequent
to project approval, the project design document must
be posted for 30 days to allow interested parties at the
local, national or international level to comment on it.
CDM PROJECT TYPES
A generic description of CDM projects include:
Energy efficiency projects
■ Increasing building efficiency;
■ Increasing commercial/industrial energy efficiency;
and
22
■ Implementing fuel switching from more carbon-
intensive fuels (such as coal and oil) to less carbon-
intensive fossils (such as natural gas or various
alternative energy sources). Fuel switching also
includes re-powering, upgrading instrumentation,
controls, and/or equipment. Fuel switch projects can
also refer to new or to be developed projects.
Methane recovery
■ Animal waste methane recovery and utilization
(methane recovery technologies include installing
an anaerobic digester (microbial breakdown in a
controlled environment capturing the Methane) and
utilizing methane to produce energy);
■ Coal mine methane recovery (collection and
utilization of fugitive methane from coal mining);
■ Capture of biogas (landfill methane recovery and
utilization);
■ Capture and utilization of fugitive gas from gas
pipelines;
■ Methane collection and utilization from
sewage/industrial waste treatment facilities; and
■ Methane collection and utilization from any addi-
tional sources not mentioned above.
Industrial process changes
Any industrial process change resulting in the reduc-
tion of any category greenhouse gas emissions.
Cogeneration
The use of waste heat from electric
generation, such as exhaust from gas turbines, for
industrial purposes or heating.
Transport
■ Improvements in vehicle fuel efficiency by the
introduction of new technologies;
■ Changes in vehicles and/or fuel type, for example,
switch to electric cars or fuel cell vehicles;
■ Switch of transport mode, e.g. changing to less car-
bon intensive means of transport like trains; and
■ Reducing the frequency of the transport activity.
Agricultural sector
■ Energy efficiency improvements or switching to less
carbon intensive energy sources for water pumps
(irrigation);
■ Methane reductions in rice cultivation;
■ Reducing animal waste or using produced animal
 CHAPTER 2: GOING THROUGH THE CDM PROCESS

waste for energy generation (see also under methane
recovery); and
■ Any other changes in an agricultural practices result-
ing in the reduction of any category of greenhouse
gas emissions.
Land use
In the first commitment period (2008-2012), this
category is limited to afforestation and reforestation
activities (see box 2.1).
Project identification
A potential CDM project can be identified by host country

BOX 2.1: LAND USE AND LAND-USE CHANGE ACTIVITIES PERMITTED UNDER THE CDM
A decision was made in Marrakech during COP 7 (2001), to include afforestation and reforestation as the only eligible land-use
activities in the CDM These may be large or small-scale, single or multiple species, pure forestry or on farm systems, such as:
■ Establishment of woodlots on communal lands;
■ Reforestation of marginal areas with native species, e.g. riverine areas, steep slopes, around and between existing forest frag-
ments (through planting and natural regeneration);
■ New, large-scale, industrial plantations;
■ Establishment of biomass plantations for energy production and the substitution of fossil fuels;
■ Small-scale plantations by landowners;
■ Introduction of trees into existing agricultural systems (agroforestry); and
■ Rehabilitation of degraded areas through tree planting or assisted natural regeneration.
As mentioned above, afforestation and reforestation are the only eligible land use activities in the CDM. There is some
uncertainty, however, over which definitions will be adopted for these terms. This is currently under review, with a decision
expected in 2003. The definitions in the official negotiating text, as of 2002, relate to forest and land use activities within devel-
oped countries, and are:
■ Afforestation is the direct human-induced conversion of land that has not been forested for a period of at least 50 years to
forested land through planting, seeding and/or the human-induced promotion of natural seed sources.
■ Reforestation is the direct human-induced conversion of non-forested land to forested land through planting, seeding or
human-induced promotion of natural seed sources, on land that was forested but that has been converted to non-forested
land. For the first commitment period (2008-2012), reforestation activities will be limited to reforestation occurring on those
lands that did not contain forest on 31 December 1989.
■ Forest is a minimum area of land of 0.05-1.0 hectares with tree crown cover of more than 10-30 per cent with trees with the
potential to reach a minimum height of 2-5 meters at maturity in situ. A forest may consist either of closed forest formations,
where trees of various storeys and undergrowth cover a high proportion of the ground or open forest. Young natural stands
and all plantations which have yet to reach a crown density of 10-30 per cent or tree height of 2-5 meters are included under
forest, as are areas normally forming part of the forest area which are temporarily unstocked as a result of human interven-
tion such as harvesting or natural causes but which are expected to revert to forest.
Even if these definitions are applied to the CDM, it is likely that developing country governments will have to decide what
definitions best apply to their natural ecosystems, within the scope of the definitions quoted here. The strict application of these
definitions to CDM, however, would exclude any forest rehabilitation, revegetation, enrichment planting and natural regenera-
tion type projects that did not involve the conversion of ‘non-forest vegetation’ to ‘forest vegetation’. This would restrict the
scope and possible benefits arising from CDM land use projects. For instance, projects based on the rehabilitation of severely
degraded forests through enrichment planting will not be eligible, given that these degraded areas may still be considered as
‘forest’ under the definitions above. Further rules and modalities regarding the types of land-use projects, other than reforesta-
tion and afforestation are yet to be finalized. They will continue to be discussed at CDM forums such as the annual Conference
of Parties to the UNFCCC meetings.

23
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

project developers/operators. These may be private com-
panies, NGOs, governments, international organizations
or international investors. Once a project is identified,
the project developer must ascertain whether the project
is eligible under the CDM and will have the support of the
host country. Considering that the CDM rules are still
evolving, a conservative approach should be taken when
assessing the eligibility of the project under CDM.
As the first step, a project developer makes an ini-
tial assessment as to whether the project is eligible
under the CDM. Box 2.3 gives an example of the kinds
of questions that a developer should ask when begin-
ning this assessment.
Project idea note
If the answers to the questions in eligibility exercise
were favourable, the project developer and/or their
advisors should develop and submit a project idea note,
or PIN, to one or more carbon credit buyers in the mar-
buyer. Even so there are great similarities between
most of the PIN formats. Most private buyers also pre-
fer to see project idea notes as their first form of con-
tact with potential projects.
Development of a project idea note is not a require-
ment of the CDM process. The benefit of preparing a
project idea note is that the developer will receive feed-
back indicating whether or not the project is of interest
to potential buyers. The project idea note represents an
inexpensive way to get market feedback without engag-
ing the entire CDM process. Different buyers may have
dissimilar motivations in the marketplace and conse-
quently look for different types of projects. This is dis-
cussed in more detail in chapters 6 and 7.
Basically a project idea note (see box 2.4 for a
template of the PIN) will consist of approximately five
pages providing indicative information on:
■ Type and size of the project;

ketplace to gauge a level of interest in the project. The ■ Its location;

project idea note will subsequently be screened by the ■ Anticipated total amount of greenhouse gas reduc-

recipient entities against the CDM rules and their tion compared to the ‘business-as-usual’ scenario
investment criteria. The information requested in the (which will be elaborated in the baseline later at
project idea note depends on the specific rules of the the project design document level);

BOX 2.2: OFFICIAL DEVELOPMENT ASSISTANCE AND CDM PROJECTS

The project developer is required to provide information on the public funding for the project sourced from any Annex I country.
This is to confirm that the public funding of a CDM project has not resulted in diversion of official development assistance or
Global Environment Facility funding. Moreover, the project developer should be able to demonstrate that the funding of a CDM
project is not counted towards the financial obligations of any donor to the country hosting the CDM project.
When using public financing, the developer/operator should list any sources of Annex-I government funding committed to the
project, or sources that the developer is, or is considering, applying for. The CDM project validator (a designated operational enti-
ty) will then assess whether these funding sources have been diverted from previous commitments under the official development
assistance programmes and/or whether such funding sources are listed as a financial obligation. If the project developer receives,
or is likely to receive, public funding from an Annex I country, it is recommended that the project developer obtains:
■ A letter from the host country stating that the host country does not object to inclusion of such public funding into the
proposed CDM project; and
■ A letter from any of the Annex I governments providing the public funding for the CDM project, stating that the money is not
reported as Official Development Assistance and is not counted towards their financial obligations. [In this context it is also
important to distinguish between the underlying project and the CDM component.]
Although official development assistance grants or concessional loans should not be considered eligible for generating
CERs, it appears that ODA could be used to facilitate early components of projects such as feasibility studies, as well as generic
transaction support activities such as setting up CDM project offices and developing local/national capacity to implement and
manage the CDM process.

24
 CHAPTER 2: GOING THROUGH THE CDM PROCESS
■ Suggested crediting life time;
■ Suggested CER price in US$/tCO2 equivalent
reduced;
■ Financial structuring (indicating which parties
are expected to provide the project’s financing);
■ Project’s other socioeconomic or
BOX 2.3: ELIGIBILITY EXERCISE
In order to determine whether the potential project is
eligible, answer the following questions:
Does my project fall into one of the following categories?
■ A project using a renewable energy sources (wind,
solar, biomass, small hydro etc.);
■ A project switching from a high carbon fuel to a lower
carbon intensive fuels;
■ An energy efficiency project on the supply side (for
example, a project improving electricity transmission
and distribution systems or updating district heating
networks, etc.);
■ An energy efficiency project on the demand side;
■ A combined heat and power generation project;
■ An agricultural sector project (other than land-use
change);
■ A project in the transport sector;
■ A project reducing methane emissions from landfills
and other waste-handling activities; or
■ A reforestation/afforestation project.
Does the potential technology meet the following
conditions?
■ A proven technology, although not necessarily active
in the host country;
■ An established and commercially feasible technology,
although not necessarily in the host country; and
■ A replicable technology and/or one that can effectively
be transferred to the host country.
Has the host country completed or been involved
in any of the following?
■ Ratified the Kyoto Protocol;
■ Designated a national focal point for approving
CDM projects;
■ Expressed willingness to voluntarily participate in a
CDM project activity;
■ Set up, or is in the process of setting up, a CDM office;
environmental effects/benefits.
While every effort should be made to provide as
complete and extensive information as possible, it is
recognised that full information on every item listed in
the template will not be available at all times for every
project. See also box 2.4 at the end of this chapter.
■ Provided national communications to the UNFCCC;
■ Participated in the AIJ pilot phase.
In relation to the question above – is the project
acceptable to the host country and does it conform to
the sustainable development requirements in the host
country?
Are the emission reductions of the project additional to
any that would occur in its absence?
Make a first rough estimate of the emission reductions
that can be achieved by the project. For this rough
analysis, the carbon emission factors from the
IPCC, www.ipcc.ch, can be used.
If the project has been financed by sources of public
funding, it must be confirmed that the sources of
public funding are not counted towards the official
development assistance and GEF financial obligations
of the Annex I countries.
Does the project result in unacceptable negative impacts
on the environment? In general, it should be expected
that any project that has the potential for some
negative environmental impacts will need to have an
environmental impact assessment.
Note: There are several computer software programmes avail-
able on the Internet that can assist in the project identification
and screening stage. At this time, most of the programmes are
not elaborate enough to fulfill all of the requirements. However
they serve as useful tools in the early stages of the process.
Specifically, software can assist a project developer to verify that
their project offsets a sufficient amount of carbon to be of inter-
est to buyers before they spend a sizable amount of time and
resources developing the project into a CDM project. Examples
of the software include ProForm, developed by the Lawrence
Berkeley Livermore Lab (http://poet.lbl.gov/Proform/) and
RETScreen (http://www.retscreen.net/ang/d_o_view.php)
developed by the Canadian Government.
25
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
The project design document
The project design document, or PDD, is the key documen-
tation in the project cycle, and completing it is complex
undertaking. As illustrated in the CDM process flow
chart in this chapter, the PDD is submitted to a desig-
nated operational entity for validation, and once vali-
dated, to the CDM Executive Board for registration. As
opposed to a PIN, a project design document is a neces-
sity – no project can earn CERs without the develop-
ment, validation and Executive Board acceptance of it.
The PDD can also be a valuable sales tool for potential
investors. Chapter 3 provides a full explanation of the
project design document process.
Stakeholder participation
Stakeholder participation and public meetings are
effective – indeed vital – to ensure transparency in the
CDM process. For CDM projects there is a specific
requirement to invite local stakeholders for comments.
Accordingly project developers must:
■ Invite local stakeholders to comment on the project
design document;
■ Provide a summary of the comments received; and
■ Review comments received and provide a report,
demonstrating how relevant concerns were
addressed. This report has to be submitted for
validation by the operational entity
This local stakeholders consultation process is dis-
tinct from the invitation for comments from stakehold-
ers by the designated operational entity, during the
project validation phase. Stakeholders at the interna-
tional level are invited to provide their comments
regarding the specific CDM components of the activity.
In contrast to local stakeholders the international
stakeholders are not actively approached; they are
made aware of new CDM projects. The rationale is to
empower the international and/or national community,
especially NGOs, to monitor projects proposed for the
CDM.While the Marrakech Accords refer to accredited
NGOs, it is clear that some NGOs will be more compe-
tent than others to provide constructive feedback to the
CDM activity in the host country.
See chapter 3 for further information about inte-
grating stakeholder comments into the project design
documentation.
26
Host country approval
CDM projects have to be approved by the host country.
Host country approval is one of the key components to
ensure that governments retain all sovereignty over
their natural resources, including over their ability to
mitigate emissions. Apart from approving the develop-
ment of the proposed project under CDM, it is also the
host country’s responsibility to confirm whether a
CDM project activity will help it meet its own sustain-
able development criteria. A host country is accorded
an enormous amount of leeway in choosing to accept
or reject the CDM component of particular projects.
The Marrakech Accords and Delhi Declaration do not
provide specific guidance on the form or content this
approval should take, except to note that it should be a
‘written’ approval from its designated national authori-
ty. Accordingly, subject to further clarification from the
Executive Board and COP/MOP, an official Letter of
Approval from the designated national authority will
serve as evidence of host country acceptance. The letter
should state that the host country accepts the project as
well as recognizes its contribution to sustainable devel-
opment. A template of such a Letter of Approval is avail-
able in chapter 5. However, depending on the situation
and national practices in the host country, other for-
mats containing the necessary information may be used.
The project developer is responsible for the project
submission to the appropriate authorities in the host
country as part of the process of host country accept-
ance of the CDM project.
In order to facilitate this process the project devel-
oper should:
■ Check the UNFCCC website to determine who/what
entity (agency) has been designated as the national
focal point or authority for climate change issues
(see http:// unfccc.int/resource/nfp.html).
■ Check with the focal point to see if the country
has established any guidelines or procedures for
approving CDM projects;
■ Check the status of a host-country with regards to
meeting eligibility criteria for the CDM. If a county
did not ratify the Kyoto Protocol, projects within its
borders will not be eligible under the CDM. The risk of
starting a CDM project in a country that is not a Party
 CHAPTER 2: GOING THROUGH THE CDM PROCESS
to the Kyoto Protocol is borne by the project developer.
It is strongly recommended to obtain some form of
host-country approval or indication, which would
state that the country under consideration has the
intention to -- or is preparing to -- become a Kyoto
party before continuing. It can be assumed that the
country is seriously interested in obtaining such status
if it has set up, or is in the process of setting up, a
CDM office; been involved in the AIJ pilot phase; pro-
vided national communications to the UNFCCC; and/or
appointed a national focal point for climate change.
Validation by the designated operational entity
Once the project design document has been completed
and the host country approval has been received,
all documents have to be submitted to a designated
operational entity, or DOE, for review and approval –
a process called validation.
Validation is the process of evaluation of all relevant
documents for a CDM project activity against the require-
ments for CDM as set out in the Kyoto Protocol, the
Marrakech Accords and the Delhi Declaration. Validation
occurs at the outset of a project and is distinct from veri-
fication, which occurs during the operation of the proj-
ect. In effect, the validation process confirms that all the
information conveyed and assumptions made within the
project design document are accurate and/or reasonable.
The designated operational entity will ground-truth data
on greenhouse gas emissions, as well as data and assump-
tions made regarding technical, social, political, regulato-
ry and economic impacts of the project activity, as includ-
ed in the project design document.
Project activities that began in 2000 may be eligible
for CDM validation and registration if they are regis-
tered before 31 December 2005. This means that CERs
can be generated prior to 2008, which is a significant
difference from the Joint Implementation procedures,
which specified that only emission reductions generat-
ed between 2008 and 2012 have value. Moreover, the
Marrakech Accords acknowledge a special regime with
retroactive benefit for project activities that began
prior to November 2001 (the date of adoption of the
Marrakech Accords). These ‘pre-Marrakech’ CDM project
activities shall be eligible for validation and registra-
tion if submitted for registration before 31 December
2005. If registered, the crediting period for such project
activities may start before the date of registration but
not earlier than 1 January 2000.
It is generally the responsibility of the project devel-
oper to arrange for validation and to contract, and pay
for, the services of a designated operational entity.
Though there are purchasers who will absorb these costs,
it should be expected that those costs will ultimately be
subtracted from the eventual CER transaction. The proj-
ect developer has to submit the following documents to
the designated operational entity for validation:
■ The project design document; and
■ Confirmation from the host government that the
project meets host country requirements, fosters
sustainable development and has been approved.
The project developer must use one of designated oper-
ational entities as listed and accredited by the Executive
Board for validation. As they become accredited, a list of
designated operational entities will be made available on
the CDM website (http:// unfccc.int/cdm).
The Marrakech Accords specifically require CDM
consultation at the international level. The responsibil-
ity for managing this consultative process lies with the
designated operational entity. To undertake this, the
designated operational entity issues invitation for com-
ments from all interested parties, generally simply by
posting a validation on its website. This component is
required and is in addition to the participation of local
stakeholders (which is the project developer’s responsi-
bility) in the earlier stages of project development.
Responsibilities of the designated operational entity
in the consultative process are:
■ Making the project design document publicly
available for comment by parties, stakeholders and
UNFCCC accredited observers.
■ Allowing 30 days, from the date from which the
project design document is made publicly available,
for receipt of comments.
■ Recording comments, both verbal and written, and
making available a report, which explains how the
comments received have been accounted for.
Below are some important issues to consider when
contracting a designated operational entity:
■ The contractual arrangement with the designated
27
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
operational entity should specify which activities
will be validated.
■ The arrangement should establish what recourse is
available if the validation report is inadequate, or if
the Executive Board/Supervisory Committee or the
host country do not accept it.
■ It is recommended that a designated operational enti-
ty be contacted at least one month before the date at
which the validation report is expected or needed.
This does not include the 30 days required for public
comments by the designated operational entity.
■ It is recommended that the project developer and/or
its advisors interact with the designated operational
entity throughout the validation process to stream-
line it. One way to do this, for example, would be by
delivering draft versions of the project design docu-
ment or components of it as they are completed. That
way, points of concern and ways to address them
could be discussed with the designated operational
entity in advance.
■ Some validators may be more experienced in specific
project categories than other auditors. For instance,
one validator may specialize in renewable energy or
in specific host countries, whereas others may have
expertise in carbon sequestration. The list published
at the UNFCCC website does not point out if a desig-
nated operational entity has specific qualifications.
The Executive Board does not prescribe which of the
designated operational entities should be used, and
this is the project developer’s decision. However,
experts in the field should be able to assist developers
in this regard.
■ Please note that a single designated operational enti-
ty can carry out both the validation and verification
(see below) only if the request is made to the CDM
Executive Board. Although this is allowed under the
rules of the Marrakech Accords, using the same DOE
for both tasks can result in conflicts of interest, and
should therefore be considered carefully.
■ The designated operational entity is also responsible
for requesting registration of the project, and it is
recommended that the project developer ask for a
copy of the request.
Based on the review and comments provided, the
28
DOE will make a decision as to whether the project can
be validated. The designated operational entity should
make the validation report publicly available upon
transmission to the Executive Board.
The designated operational entity solicits public
comments on the validation report. The validation
report is then submitted to the Executive Board. The
Executive Board makes designated operational entity
validations available for public comment for 30 days on
the UNFCCC website. and collects comments from the
general public on the report.
Registration
Registration of the project with the CDM Executive Board
is the act of formal acceptance of the validated project.
The request for registration of a CDM project is the
responsibility of the designed operational entity. The
DOE submits the validation report and host country
approval to the Executive Board for registration. The reg-
istration of the project with the Executive Board will be
final after a maximum of eight weeks after validation
and the submission of the project to the Executive Board,
unless a review is requested. It is recommended to ask
the designated operational entity for a copy or confirma-
tion of its request for registration.
The review by the Executive Board must be related
to issues associated with the validation requirements
for CDM projects. Until the review is finalized by the
Executive Board, the decision for validation is not final
and thus the project cannot be registered. Apart from
the mandatory registration of the CDM project with the
Executive Board, the host country may also require reg-
istration of the project. It is advised to check with the
designated national authority in the host country for
requirements regarding registration of CDM projects.
Implementation and monitoring
Once the project has been registered, it can be imple-
mented. Since CERs can accrue from the point of valida-
tion during this first stage of the CDM, certain projects
may already be implemented prior to registration dur-
ing these first several years. From the point of imple-
mentation on, the project developer needs to start mon-
itoring the project performance, according to the proce-
dures laid out in the validated monitoring plan of the
project design document. The monitoring results have
 CHAPTER 2: GOING THROUGH THE CDM PROCESS
to be submitted to a designated operational entity for
verification and certification (see annex 3).
The project developer is responsible for monitoring
the project’s performance according to the require-
ments set out in the validated monitoring plan.
However, the performance of the ‘business as usual sce-
nario’ – or baseline – may or may not have to be moni-
tored, depending on requirements of the buyer, during
the period for which the baseline has been fixed and
validated by a designated operational entity. Even if
the buyer does require monitoring, the baseline is fixed
for at least seven years, when it may have to be adjust-
ed according to new data.
At the very minimum, technical project performance,
including the project output and the related greenhouse
gas emissions, has to be monitored. In addition, environ-
mental impacts and leakage effects of the project have to
be monitored. Where possible, the monitoring should be
carried out in accordance with existing monitoring activ-
ities, to the extent possible. For example, the monitoring
of a power generation project should be linked with
activities related to the sales of electricity.
Although the monitoring plan should specify the fre-
quency of monitoring activities, no specific frequency is
required. However, CERs can only be issued after verifica-
tion of the monitored data. The frequency of monitoring
does not necessarily have to be equal to the frequency of
verification. Based on the monitoring results, the green-
house gas emission reductions from the CDM project activi-
ty can be calculated and submitted for verification as CERs.
CERs are based on reductions during the specific time peri-
od for which the monitoring results are provided.
Verification
The project developer is responsible for contracting a des-
ignated operational entity to carry out the verification
process. Verification is the periodic review and ex-post
determination of the monitored greenhouse gas emission
reductions that have occurred as a result of the CDM
project. The designated operational entity verifies the
data collected by the developer according to the monitor-
ing plan. As previously noted, the DOE contracted for
verification should not be the same one that carried out
the validation process, except in the case of small-scale
projects or when specific approval has been granted by
the CDM Executive Board. The verification process con-
firms the total number of CERs resulting from CDM proj-
ects during a specific period of time.
The frequency of verification is mainly a choice of
the project developer, assuming the designated opera-
tional entity accepts the decision. Frequent verification
(for example, every year instead of every three years)
increases transaction costs, but also allows for more fre-
quent transfer of CERs.
The designated operational entity shall make the
monitoring report publicly available and submit a verifi-
cation report to the Executive Board. This report is also to
be made publicly available. The Executive Board provides
a list of DOEs that can be contracted to carry out verifica-
tion activities on its website at www.unfccc.int/cdm/doe .
Certification and issuance of credits
Certification is the written assurance by a designated
operational entity that during the specified time
period, a project activity achieved the reductions in
greenhouse gas emissions as stated and verified, in
compliance with all relevant criteria. This process of
certification is required for CDM projects.
The designated operational entity also conducts
validation and verification and is liable for eventual
mistakes, misrepresentations, and fraud in this
process. Certification is effectively a form of liability
transfer; once the DOE has signed off, any underperfor-
mance of the CDM project with respect to the quantity
or quality of the CERs is the responsibility of the DOE.
Consequently a designated operational entity must
carry adequate liability insurance.
The certification report prepared by the designated
operational entity should consist of a request to the
Executive Board to issue the amount of emission reduc-
tions that have been verified by the DOE as CERs. When
the Executive Board approves the issuance of CERs, the
CDM registry administrator, working under the author-
ity of the Executive Board, will forward the CERs into
the appropriate accounts. This includes, if applicable,
the account for the share of proceeds, for administra-
tive expenses and forwarding the remaining CERs to
the project developer, and the 2 per cent of the CERs
required to go into the adaptation fund.
29
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

BOX 2.4: PROJECT IDEA NOTE

PROJECT IDEA NOTE

A. Project description, type, location and schedule
Name of Project: _________________________________________________
Technical summary of the project Date submitted: ____________

30
 CHAPTER 2: GOING THROUGH THE CDM PROCESS

BOX 2.4: PROJECT IDEA NOTE continued from previous page

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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

BOX 2.4: PROJECT IDEA NOTE continued from previous page

32
 CHAPTER 2: GOING THROUGH THE CDM PROCESS

BOX 2.4: PROJECT IDEA NOTE continued from previous page

33
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

34
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

CHAPTER 3:

Developing the Project Design Document

The project design document, or PDD, is the central component in the CDM project cycle, and
its preparation is a complex task. This chapter details the information, analysis and procedures
required in creating a comprehensive project design document including:

PROJECT DESCRIPTION Box 3.1: Project description for the Gemina

Project
BASELINES METHODOLOGY AND ASSESSMENT
Box 3.2: Examples of project boundaries
OF ADDITIONALITY
Box 3.3: Baseline and additionality issues
■ Choosing a baseline approach
for the Gemina Project
■ Adopting or creating a baseline methodology
Box 3.4: Crediting period for Gemina Project
■ Defining project boundaries
Box 3.5: Example of a crediting period:
■ Establishing additionality within
Wind project in Morocco
the boundaries
Box 3.6: Monitoring plan for the Gemina
■ Developing an emissions baseline
project
■ Projecting emissions
Box 3.7: The environmental impact
■ Accounting for leakage
assessment process
■ Calculating net emissions reductions
Box 3.8: Domestic and local project benefits
of the Gemina Project
CREDITING PERIOD
Box 3.9: Creating a stakeholder consultation
MONITORING PLAN

ASSESSING ENVIRONMENTAL IMPACTS

STAKEHOLDER COMMENTS
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
CHAPTER 3: DEVELOPING THE PROJECT DESIGN DOCUMENT
Success in steering a project through the CDM process
hinges largely on developing a clear, accurate and com-
prehensive project design document, or PDD. This is the
key document that the host country, investors, stake-
holders (local, national and international) and desig-
nated operational entities will use to evaluate the pro-
ject’s potential and judge its merit. Indeed, no project
can earn CERs without the development, validation and
Executive Board acceptance of a project design docu-
ment. The project design document needs to clearly
demonstrate that the project will create additional
greenhouse gas emissions beyond what would have
occurred in its absence, and that the project will sup-
port the host country’s sustainable development path.
All aspects of the project design document are
important. However, the most technically challenging
aspects have to do with establishing a baseline and
assessing the project’s additionality (see also annex 3).
Because completion of the project design document is a
substantial – and expensive – undertaking, project
developers are recommended to stay in close touch with
appropriate authorities to make sure the project sup-
ports the host country’s sustainable development crite-
ria and that the document meets their standards. Please
note that simplified project documentation is required
for small-scale projects, as defined in the Marrakech
Accords. See chapter 4 for more details on the project
design document for small-scale projects.
PROJECT DESCRIPTION
The first part of the project design document is a descrip-
tion of the project. While some of this information can
be taken from the project idea note, the PDD requires
some additional information as well. At the very mini-
mum the following project information is required:
■ Title of the project activity;
■ Purpose of the project;
■ List of project participants;
■ Technical description of the project, including loca-
tion, category, technical performance information,
36
description of opportunities for technology transfer,
and explanation of how the reduction in greenhouse
gas emissions is to be achieved; and
■ Justification that public funding, if used, is not being
diverted from other uses.
Additional recommended information:
■ Project background;
■ Problems and barriers being addressed by the project;
■ Project planning (timetable);
■ Description of the key issues and stages in project
development (milestones); and
■ Any other information deemed relevant within
reason – lengthy documents generally do not receive
extra attention.
Much of this required information can be taken
directly from a business plan or project proposal.
Information marked as proprietary or confidential does
not have to be disclosed, unless this is required under the
national law of the host country. The following informa-
tion cannot be considered as proprietary or confidential:
■ The determination of whether the emission reduc-
tions in anthropogenic emissions are additional;
■ The description of the baseline methodology and its
application; and
■ Information supporting an environmental impact
assessment requirements.
BASELINES METHODOLOGY AND
ASSESSMENT OF ADDITIONALITY
According to Article 12.5c of the Kyoto Protocol, CDM
activities must generate emission reductions additional
to any that would have occurred in the absence of the
project activity. The purpose of the baseline analysis is
to provide a transparent picture of what would have
happened without the proposed project. This is com-
monly referred to as the ‘business-as-usual’ scenario.
The analysis also provides information on the estimated
project emissions.
An estimate of greenhouse gas emissions, both in the
project situation and in the absence of the project, is the
 CHAPTER 3: DEVELOPING THE PROJECT DESIGN DOCUMENT

BOX 3.1: DESCRIPTION OF THE GEMINA PROJECT (PDD EXAMPLE)

Title of the project activity: Gemina Rice Husk Project in Nicaragua

List of project participants:

The Gemina Rice Husk Project is being developed by a joint company, Gemina Generator s. created by Grupo Gemina, a
Nicaraguan private company, and Bronzeoak Corporation, an independent group, which develops, funds and implements com-
mercial, energy and environmental projects. Gemina operates the Chinandega rice and flourmill complex and is the leading
company in that business in Nicaragua. So far, Gemina has bought electricity from the local power distribution company.
Purpose of the project:
The maximum electrical on-site demand in 2000 was 1034 kW, which is expected to increase to 1200 kW by 2002. The sup-
ply of power is somewhat unreliable and the price is highly dependent on the world price of oil. Grupo Gemina is interested in
building a biomass power plant to cover on-site electricity demand and to sell the excess electricity.
Technical description of the project:
The plant will be located in Chinandega, in the same compound as the rice mill and at less than 1 km from an ENTRESA sub-
station. The Rice Husk Power plant will produce 100 per cent of the electrical power used at the mill and would consume 80
per cent of the expected husk stream. The proposed power plant will have a capacity of 1.432 MW. The technology proposed
is based on the conventional boiler/steam turbine cycle. The husks are fed to the combustor and burned to produce heat. The
steam generated is passed to a steam turbine, which drives an electrical generator. This basic technology has been in use
commercially for more than 100 years. It has been employed with a wide range of biomass fuels including rice husks. The
subproject’s construction time is approximately 12 months and completion is expected by summer 2003. Introduction and
demonstration of modern, environmentally friendly power production techniques are an explicit objective of the project. The
project will demonstrate that emissions reductions from renewable energy can earn additional income and the introduction of
CDM know-how is expected to raise environmental awareness and generate interest in low carbon energy technologies. The
Gemina project is the first rice husk energy project introduced successfully into Nicaragua. Similar opportunities including
CO2 reductions are available in the region.
Affirmation of non-diversion of ODA:
Public resources are not used to fund this project. No affirmation required.

foundation for determining the emissions reductions ■ Assessing future emissions from the project;
that can be claimed under the CDM. The baseline repre- ■ Assessing leakage, and
sents a scenario based on certain assumptions, and is ■ Calculating projected emission reductions to be

therefore a subjective estimation. To maintain the pro-
ject’s environmental integrity, a conservative approach
should be taken. The selections, assumptions and calcula-
tions made should be presented in a clear and transpar-
ent manner and the choices justified.
The steps to developing a credible and transparent
baseline for a CDM project are:
■ Choosing a baseline approach;
■ Adopting – or creating – a baseline methodology;
■ Defining the project boundaries;
■ Forecasting what emissions would occur under the
‘business as usual’ scenario;
claimed upon future verification.
The following sections provide guidance on how to
develop an emission baseline, calculate project emis-
sions and net emission reductions – potentially
claimable as CERs – that are the direct result of the
project. See annex 3 for more detailed information
on baseline methodologies.
Choosing a baseline approach
The most significant step in setting an emission base-
line is selecting the baseline approach, which provides
the basis for a baseline methodology. When presenting
the baseline formula calculations, the emissions should

37
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
be transparently presented. In the Marrakech Accords
three different baseline approaches have been identi-
fied for CDM projects. These include:
■ Use existing, actual or historical greenhouse gas emis-
sions, as applicable; or
■ Use greenhouse gas emissions from a technology that
represents an economically attractive course of action,
taking into account the investment barriers; or
■ The average emissions of similar activities undertak-
en in the previous five years, in similar social,
economic, environmental and technological circum-
stances, and whose performance ranks among the
top 20 percent of their category.
Adopting or creating a baseline methodology
A baseline methodology is an application of any of the
above approaches and can be identified on a case-by-case
basis. Before developing the emission baseline it is recom-
mended to check with the CDM Executive Board to see
what baseline methodologies have been accepted. This
information can be taken from the UNFCCC website,
www. unfccc.int/cdm , which includes a reference list of
approved methodologies. A project developer is free to
develop a new methodology not included in the list.
However, a new methodology has to be approved by the CDM
Executive Board before any project developer can use it.
Defining the project boundary
In order to determine which greenhouse gas emissions
need to be estimated and calculated for establishing the
emission baseline and project emissions, the project
boundary has to be defined. A project boundary comprises
all anthropogenic emissions by sources of greenhouse
gases under the control of the project participants that
are significant and reasonable attributable to the CDM
project activity. The activities and greenhouse gas emis-
sions that are included in the project boundary reflect:
■ Activities that will be included in the emission base-
line and baseline calculations; and
■ Activities and greenhouse gas emissions that will be
monitored once the project is operational.
The procedures to define the project boundary for
the calculation of the baseline emissions and for the
project emissions should be consistent and similar,
whenever possible. However, in some cases they may
differ. For example, a waste treatment facility devel-
38
oped to digest waste into methane and capture energy
would have as its original baseline boundary the exist-
ing waste management system, while the project sce-
nario would need to expand its boundary to include the
new equipment (digester, piping and combustion sys-
tems), which have their own emission signatures. The
developer should offer sufficiently robust documenta-
tion to justify the choice of alternative boundaries.
All significant greenhouse gas emission reductions
from the proposed CDM activity that are reasonably attrib-
utable to the project developer/operator and to the project
activity should be included in the project boundary. The
project developer should only assess and describe the
impacts of the project activity on greenhouse gas emis-
sions under his or her control. A useful proxy for estimating
the ‘under control’ criteria is whether the project developer finan-
cially controls the activity. For example, while a project oper-
ator will likely financially control the generation of elec-
tricity, the operator will not control transport and distri-
bution losses or the transport of fuels to the project. Any
emissions related to these activities can thus be consid-
ered outside the project developer’s control, unless the
project activity specifically causes a change in activity
levels that affects emissions (see also annex 3).
Setting a project boundary will take into account:
■ Geographic factors should respond to the questions as to
over what activities and in which geographical area
should a project be compared? For example, against all
similar activities in a country, in a specific region, at
one specific location, across national borders, or at
another level?
■ Activity level pertains to the activities whose emissions
should be included in the baseline. For example,
should emissions related to the construction of a
facility be included or not, should upstream and
downstream emissions be included?
To summarize, emissions from activities that are
directly related to the project output and site location
should be included within the project boundary.
Emissions related to activities not directly related to
the project can be excluded. Exceptions can be made
when it can be clearly demonstrated that the impacts of
a direct activity are very small, or negligible, compared
to the total. These may be excluded from the project
 CHAPTER 3: DEVELOPING THE PROJECT DESIGN DOCUMENT
boundary. Conversely, when emissions from indirect or
off-site activities are considered significant and within
control of the project developer, these emissions should
be included in the project boundary. These impacts
should be estimated on a case-by-case basis and the deci-
sions must be justified.
It is recommended that the project boundaries
BOX 3.2: EXAMPLES OF PROJECT BOUNDARIES
Greenfield power supply project (wind turbines)
For this wind power project to be installed in Morocco, the
system boundary has been defined as including direct emis-
sions related to the mix of power that would have been put
into service in Morocco in absence of the project. The project
boundary for the emission baseline includes:
■ All grid-connected facilities within Morrocco and
■ All emissions related to on-site fuel combustion for elec-
tricity generation, from projects connecting to the grid.
The boundary defined for this project only includes direct
on-site emissions related to the fuel consumption required to
generate electricity. For a wind project these are zero. To con-
sider a form of leakage (in this case, a very minor one), one
might hypothesize about additional emissions from mainte-
nance vehicles servicing the new site, but which are not
accounted for in the baseline construct.
The project boundary excludes:
■ Direct off-site emissions related to losses from transmis-
sion and distribution of electricity to the grid and end user
■ Emissions related to off-site activities, such as those relat-
ed to the construction of the turbines.
Off-grid power supply (solar home systems)
For a project installing solar home systems for lighting, only
direct on-site emissions related to the use of kerosene for
lighting are included in the project boundary. Indirect-off site
emissions from the construction of the photovoltaic panels
used in the solar systems are excluded from the baseline.
Indirect on-site emissions from the continued use of kerosene
lamps (in addition to the solar-powered lights) have been
identified as a potential source for leakage.
Fuel switch (Biomass Energy Portfolio)
The project boundaries of the Biomass Energy
Portfolio project in the Czech Republic include both
should be drawn in the form of a flowchart that clearly
shows included and excluded emission sources. The
emission sources that are included should be those that
are considered to be within the control of the project.
The issue of project boundaries is further illustrated
in the examples presented below.
direct and indirect on-site emissions:
■ Direct on-site emissions from the combustion of fuels for heat
or power generation are included in the project boundary. The
net emissions from the combustion of biomass (forestry and
agricultural waste) are assumed to be zero, because they are
offset by the amount of emissions sequestered during the
growth of the biomass.
■ Direct off-site emissions related to the electricity used from
the grid for driving the boilers and the combined heat and
power components are not included because these are negligi-
ble (less than 0.5 per cent of the energy generated).
■ The baseline takes into account off-site methane emissions
that would occur in the absence of the project from the anaero-
bic process of waste disposal from agricultural and forestry
residues. These emissions are substantial compared to the
emissions related to the combustion of fossil fuels because the
global warming potential of 1 ton of methane emissions is 21
times higher than the GWP of 1 ton of CO2 emissions.
■ The indirect off-site emissions related to the transport of fuels
are excluded from the project boundary because they are
extremely small, difficult to monitor and it is assumed that the
emission differential of transporting conventional fuel (as
opposed to transporting biomass fuel to the combustion site)
to be statistically insignificant.
Energy efficiency (demand side management)
The direct on-site emissions from an energy-efficiency project
in India result from the reduction in electricity consumption
compared to what would otherwise have occurred. The fol-
lowing emissions have been included in the project boundary:
■ Emissions related to production of electricity that would other-
wise have been used by the end-user (one step upstream).
■ Direct off-site emissions related to the reduced losses in
transmission and distribution of the heat and power to the
grid and end-users.
39
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

Establishing additionality within the boundaries
The concept of additionality is critical to CER determi-
nation. CDM projects have to “generate emission
reductions that are additional to any that would have
occurred in the absence of the project activity.”
Additionality directly refers to whether of the project
activity results in a lower volume of greenhouse gas
emissions – or greater sequestration of carbon in the
case of forest sinks projects – relative to the ‘no-project’
case. The issue of additionality is particularly impor-
tant to prevent benefits from the CDM process going to
projects that would have happened anyhow or have
already been undertaken.
Not all projects that appear to have positive green-
house gas impacts are additional. For example, renam-
ing an existing hydroelectric plant as a CDM project
will not result in additional greenhouse gas mitigation.
Projects that are undertaken to meet legal or policy
obligations also would have a difficult time demonstrat-
ing additionality. Eligibility demands that a project
developer clearly demonstrate that the project’s prac-
tices are ‘additional’ to what would otherwise have
occurred (that is, compared to the ‘business-as-usual’ or
baseline scenario). It is necessary to demonstrate that
the project was initiated, at least in part, with the
objective of reducing greenhouse gas emissions.

BOX 3.3: BASELINE AND ADDITIONALITY ISSUES FOR THE GEMINA PROJECT (PDD EXAMPLE)

ISSUE EXPLANATION

EMISSIONS BASELINE Continuing purchasing electricity from the public grid (Fossil fuel intensive).
BASELINE APPROACH The approach of using existing, actual and historical emissions is used to calculate
the emissions in the situation with and without the Grupo Gemina project.
PLAUSIBLE SCENARIOS The same approach was selected for the husk disposal analysis.
Electricity
1) 100 per cent of the system capacity in condition to operate (It includes
renewable, heavy fuel oil and light fuel oil operated plants).
2) 50 per cent of the system hydro-capacity in condition to operate
(It includes both heavy and light fuel-operated plants).
3) Sugar mill and hydro-capacity are unavailable.
RELEVANT BASELINE FACTORS Rice husk disposal
1) Increase of the husk produced to 25,000 t/year.
2) 15,000 t/year of husk as the maximum consumption from the plant.
Electricity:
■ Deregulated energy market conditions.
■ Access of small projects to the energy market,
■ No policy to encourage the use of renewable energy
Rice husk disposal:
100 per cent of the husk has been historically disposed to open landfills.
GEOGRAPHICAL BOUNDARY Electricity: Nicaragua electric energy system, Central America energy system.
Rice husk disposal: Gemina plant and dump sites around the plant.
PROJECT BOUNDARY Flour and rice mill.
Rice husk storage and transportation.
CREDITING PERIOD 21 years – from 2003 to 2023
LEAKAGE CO2 emissions during the construction phase considered irrelevant.
GREENHOUSE GAS COVERAGE CO2, NH4, NO2

40
 CHAPTER 3: DEVELOPING THE PROJECT DESIGN DOCUMENT
Developing an emissions baseline
Additionality is quantified by measuring the change in
greenhouse gas emissions observed when comparing the
‘business as usual’ case with the emissions under the
project (the ‘project scenario’ case). However, since the
non-project emissions cannot be directly observed, the
claimed differential – and the CER commodity – is
strictly a mathematical algorithm that is subject to
challenge and dispute about its underlying assumptions.
The emission baseline serves to;
■ Confirm the project’s additionality;
■ Estimate the amount of greenhouse gas emissions that
would occur without the project, and estimate the
amount of emissions that will occur with the project.
The development of an emission baseline is based on
assumptions regarding future activity and performance –
and should be based on the most credible assumptions
possible. Some projections can be quite robust, whereas
others are more nebulous. The assumptions underpin-
ning the baseline can often be interpreted in different
ways and can result in different conclusions among
different observers.
In any case, the emission baseline has to be estab-
lished in a transparent manner with regard to the
choice of approaches, assumptions, methodologies,
parameters, data sources and other key factors.
Emission baselines have to take into account relevant
national and sectoral policies and circumstances such
as sectoral reform initiatives, local fuel availability,
power sector expansion plans and the economic situa-
tion in the project sector. All these factors should be
addressed when setting the emission baseline and then
translated in the calculation of the baseline emissions.
The baselines assumptions and study are validated
by an operational entity to ensure that the analysis is
undertaken within all the relevant guidelines of the
approved methodology. Members of the international
CDM community also may comment and raise concerns
about the baseline to the Executive Board during the
30-day commenting period.
Projecting project emissions
In order to determine whether a CDM project will make
financial sense, its projected future emissions have
to be estimated at the outset. Similar to the baseline
emissions, project emissions need to be estimated and
calculated in a transparent manner for each year dur-
ing the crediting period. For purposes of the project
design document, emissions have to be projected from
the project startup to the end of the crediting period.
The development of an emission baseline is based
on assumptions regarding future activity and
performance – and should be based on the most
credible assumptions possible.
In most cases, the project boundary selected for the
emission baseline will also apply to measuring green-
house gas emissions resulting from the project. If the
two boundaries are different, an explanation should be
provided.
For energy supply projects, direct on-site emissions
can be calculated from the estimated project output and
the emission factor for the project. The direct off-site
emissions are calculated in a similar way.
For demand side management projects, project emis-
sions can be calculated by multiplying the various activ-
ity level changes (i.e. reduction in energy used, reduc-
tion in transmission and distribution losses, etc.) with
the appropriate and defined emission factors for those
activities.
Special attention must be given to indirect on-site
emissions, which constitute the ‘rebound effect’. The
rebound effect occurs when lower marginal costs of
energy or increased energy capacity stimulate higher
energy use. Additional emissions from the rebound
effect should be included in the calculation to give the
total project emissions.
Accounting for leakage
Leakage refers to indirect and off-site greenhouse gas
emission flows that are outside the project boundary
and thus not accounted for in the baseline. It can be
extremely difficult to identify and/or control leakage.
If the quantity or leakage is significant, the project
boundary should probably be redrawn to capture it so
that the emissions become a part of the baseline calcu-
lation. In any case, the project developer should assess,
41
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
account for and calculate potential points of leakage,
and the same should subsequently be a part of the mon-
itoring plan. Note that potential sources of leakage vary
by project type (see also annex 3).
Possible effects from the project activity that can be
considered when assessing leakage are:
■ Activity shifting means that emissions are not perma-
nently avoided, but simply displaced to another area.
This has been a particular concern in regards to con-
servation based forestry projects (currently not appli-
cable under the CDM) that seek to slow or stop logging
in a particular zone, but whose net effect may be to
push logging activities into more remote areas. In
energy projects, these issues are largely covered under
outsourcing.
■ Outsourcing is the purchase or contracting of services
or commodities that were previously produced or
provided on-site. The greenhouse gas emissions that
took place within the project boundary prior to the
outsourcing would be classified as leakage, and the
emissions from the outsourced activities should be
accounted for. For example, if a company simply out-
sourced its transportation needs to another concern,
the emissions associated with the transportation
would be considered leakage.
Leakage does not disqualify a project’s validity,
unless the projected values of emissions under leakage
are potentially significant and cancel out a sizeable per-
centage of the projected greenhouse gas emission reduc-
tions from the project. In such a case, as noted above,
all attempts should be made to formally incorporate the
source of the leakage into the project boundaries (and
therefore into the baseline and emission scenarios)
Calculating net emission reductions
The net emission reductions generated by a project is
calculated by subtracting the total project emissions
from the baseline emissions and adjusting for leakage.
Calculations should be made for each year of the credit-
ing period and expressed in tons of CO2 equivalent. As
with the other calculations, all numbers and assump-
tions must be transparent.
42
CREDITING PERIOD
The project design document must define the period
that the project developer seeks to earn credits. The
crediting period is an important determinant of emis-
sion reductions that can be generated from and claimed
for a CDM project. The crediting period thus has a
direct impact on the value of the project.
During the crediting period the defined emission
baseline cannot be adjusted or revised. The crediting
period will often differ from the project lifetime. The
project lifetime is, in general, longer than the period
over which carbon credits can be claimed. For the CDM,
project developers have two options to determine the
crediting period. They are:
■ A crediting period for a maximum of seven years,
which may be renewed at most two times; or;
■ A maximum crediting period of ten years with no
option for renewal.
An important consideration in selecting the credit-
ing period for a CDM project is the period over which
the emission baseline (against which emission reduc-
tions are measured) is fixed. A fixed emission baseline
is set and agreed upon when the project is designed (ex-
ante). Once validated it cannot be renewed. This issue
should be reviewed during project development. Choice
of crediting period is a strategic decision that involves
consideration of the emissions trajectory of the sector
in question.
BOX 3.4: CREDITING PERIOD FOR GEMINA PROJECT IN
NICARAGUA (PDD EXAMPLE)
CREDITING Selected the option of seven years with the pos-
PERIOD sibility to renew the defined baseline two times.
The project is expected to generate CERs
through the whole crediting period of 21 years.
The following box provides more detail about the
issues that should be considered when selecting the
desired crediting period.
 CHAPTER 3: DEVELOPING THE PROJECT DESIGN DOCUMENT

BOX 3:5: EXAMPLE OF A CREDITING PERIOD: WIND PROJECT IN MOROCCO

For the Tangiers and Tarfaya AIJ wind projects in Morocco a project lifetime is estimated to be 25 years, starting in 2004.
The baseline has been developed for the period 2003-2024. It is estimated in the baseline study that the project will mitigate
4.5 million tons of CO2 emissions over twenty years. Applying the rules from the Marrakech Accords for defining the crediting
period, this implies that:
■ When selecting a crediting period of 10 years, the emission baseline can remain fixed until 2012 and only approximately
2 million tons of CO2 emission reductions can be claimed as credits in this first ten-year period. The emission reductions that
will be generated in the remaining period cannot be generated as CERs.
■ When selecting a crediting of seven years with the option to renew it, the baseline remains fixed until 2009.
If this option is selected, the project developer has the possibility of renewing the baseline two times for another seven
years each with the opportunity to claim the remaining CO2 emission reductions. However, the the amount of emission reduc-
tions that can be claimed after baseline adjustment are ambiguous, because the baseline against which the emission reductions
are calculated as well as the baseline methodology will be reconsidered after the first seven-year period.

MONITORING PLAN ■ Duration of the measurements;

A monitoring plan is a required element of the project ■ Who is responsible for collection of the data;

design document. The plan outlines how data will be col- ■ Who is responsible for archiving the monitoring data;

lected from the project once it is operational. Although ■ Backup system for data collection; and

the monitoring plan is supplied to the designated opera- ■ Who has the ultimate responsibility for carrying out

tional entity for validation (and must be validated as
part of the project design document), the project develop-
er is responsible for implementation of the monitoring
plan and sending the results to the designated opera-
tional entity for future verifications of CER production.
Information required in the monitoring plan:
■ The boundaries of what will be monitored are defined;
■ The means by which relevant data will be collected
and archived. (Monitored data should be kept for two
years after the end of the last issuance of CERs.);
■ The frequency of data collection;
■ How future leakage may be assessed and estimated;
■ What the control procedures are, and how quality
control for the monitoring process is dealt with;
■ How the data on non greenhouse gas environmental
impacts will be collected and archived; and
■ A justification of the choice of monitoring methodology.
Other information that can be helpful:
■ Specifications of verification activities that will take
place;
■ Method of measurements and calibration methods;
■ If applicable, explanation on how to deal with
missing data;
all stages of monitoring process?
The data collected as specified in the monitoring
plan form the basis for verification of emission
reductions as a result of the CDM project activity.
The monitoring plan should provide for the collec-
tion and archiving of all relevant data necessary for
measuring project-specific greenhouse gas emissions
within the defined project boundary and over the
appropriate crediting period.
The monitoring plan must describe the relevant
data characteristics of the project to be measured. The
plan may also indicate who is responsible for the meas-
urements, as well as protocols for the collection and
reporting of the monitoring activities. The monitoring
should be carried out in such a way that the indicators
of project performance and emissions can be readily
compared with the baseline scenario. From the perspec-
tive of keeping future expenditure under control, it is
important that the monitoring plan be developed in a
manner to making future verification as simple and
cost-effective as possible. The verifying designated oper-
ational entity closely monitors the data collected under
the monitoring plan.

43
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

BOX 3.6: MONITORING PLAN FOR GEMINA PROJECT IN NICARAGUA (PDD EXAMPLE)

ISSUE EXPLANATION

MONITORING The monitoring plan contains indicators that can be observed and includes monitoring and operational obli-
gations and management responsibilities. Emissions are quantified for both components in the baseline – the
electricity generation and rice husk disposal, and summed up to give the emission reductions for the project.
DATA TYPE ■ Electricity generated at the site.
■ Weighing the rice husk at the dump site.
■ Weighing the ash produced.
RECORDING Data for all three data types will be collected every year in the first quarter of the year.
FREQUENCY
ARCHIVE All data will be kept in an archive until 10 years after the last issuance of CERs.

SUSTAINABLE The monitoring plan establishes a comparison of the project’s actual environmental and development
DEVELOPMENT performance as measured by the indicators against set target values in order to determine whether the
targets have been reached.
A summary sheet is included in the monitoring plan to decribe how the sustainable development
performance will be monitored.

A similar table will have to be filled out for ■ Noise level;

activities that are potential sources of emissions but ■ Use of natural resources;
occur outside the project boundaries. ■ Chemical usage and disposal;

■ Landscape pollution (such as wind farms); and

ASSESSING ENVIRONMENTAL IMPACTS ■ Overall process efficiency and waste managements.

The project design document should include an assess-
ment of the environmental impacts of the project. This
includes an assessment of non-greenhouse gas related
impacts. If there are significant negative environmen-
tal impacts, these can disqualify the project from par-
ticipation in the CDM, particularly if local or interna-
tional stakeholders raise significant objections. For
example, large scale hydropower projects involving
significant flooding and dislocations.
The developer should consider whether the project
may have significant impact on one or more of the
variables listed below.
■ Biodiversity;
■ Local air quality;
■ Water resource availability;
■ Water resource quality;
■ Soil contamination;
■ Soil erosion;
Any mitigation efforts to address such impacts
should be clearly stated in the project design document.
The developer should expect that the designated opera-
tional entity and third party observers will give close
consideration to these issues.
If potential environmental impacts of the project are
considered significant, or if an environmental impact
assessment (EIA) or review is legally required by the host
country, this has to be conducted and documented in the
project design document. There are no specific indicators
for determining what is considered a ‘significant impact’.
This will have to be assessed on a case-by-case basis.
Sustainable development criteria can also provide guid-
ance for determining the environmental impact.
The designated operational entity evaluates the jus-
tification for assessing the environmental impacts. The
box below outlines the process for assessing and review-
ing environmental impacts.

44
 CHAPTER 3: DEVELOPING THE PROJECT DESIGN DOCUMENT

BOX 3.7: THE ENVIRONMENTAL IMPACT ASSESSMENT PROCESS

The following is a short summary of the steps involved in conducting an environmental impact assessment.
Screening: the process of determining whether or not environmental impact assessment is required for a particular project.
Scoping: the process of determining the content and extent of the matters to be covered in the environmental information.
This should be done in consultation with the appropriate authority.
Impact predictions: the identification of all likely impacts associated with the project in the areas determined through the
scoping, with authoritative and, if possible, quantitative predictions about their effects.
Preparation of assessment including:
■ Description of the project (physical characteristics, land use requirements, production processes and an estimate – by type
and quantity – of expected residues and emissions resulting from the operation of the proposed project);
■ Identification of alternatives (in terms of location of the proposed project and estimates of alternatives– the main reason for
the choices have to be indicated);
■ Description of environmental and demographic phenomena likely to be affected (population, fauna, flora, water, air, soil,
climate factors, material assets, landscape and the interrelation between the above factors);
■ Description of the likely significant effects resulting from; the existence of the project, the use of natural resources, emissions
of pollutants, the creation of nuisances and the elimination of waste, and the descriptions of the forecasting methods used to
assess the effects on the environment;
■ Description of mitigation measures to prevent, reduce and, where possible, offset any significant adverse effects on the
environment;
■ Non-technical summary; and
■ Decision on project future on the basis of the assessment and other decision-making parameters.

BOX 3.8: DOMESTIC AND LOCAL PROJECT BENEFITS OF GEMINA PROJECT (PDD EXAMPLE)

ISSUE EXPLANATION

LOCAL Reduced greenhouse gas emissions to atmosphere, over project lifetime,

ENVIRONMENTAL Reduces use of landfill for waste husk and associated methane gas releases to atmosphere.
BENEFITS Eliminates risk of self combustion of the waste piles and associated methane and nitrous oxide releases to
atmosphere.
Significantly reduces fugitive dust from waste piles both on site and off site.
Vehicle movements, used to transport husk, and associated noise and gaseous emissions will be reduced.
SOCIO-ECONOMIC Commercially competitive with existing sources of electricity to end user.
BENEFITS Job creation (mostly higher income skilled labor) and investment in areas which have difficulty attracting
new investment.
CAPACITY Reduced rice production costs in Nicaragua.
BUILDING The project will allow local producers to increase production with associated job creation and investment.
The project will reduce dependence on imported fossil fuel with replication possibilities both in Nicaragua
and in Central America.
Project implementation includes capacity building components to enable the local community to
contribute to, and administer its involvement in, the project.
ENVIRONMENTAL An environmental impact statement has been carried out by the project operator in consideration of
IMPACT ASSESSMENT World Bank safeguard and policies as part of the detailed project design.

45
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

If an environmental impact assessment or review is
required, the project developer must indicate if and
when it has been, or will be, completed. Moreover, it
should be noted where a copy of the assessment report
can be obtained. If an environmental impact assess-
ment has been carried out and the appropriate authori-
stakeholder sessions is included in the project design
document template, in annex 1.
Stakeholder participation and public meetings are
critical to maintaining transparency in the CDM process.
Indeed, the CDM requires that project developers:
■ Invite local stakeholders to comment on the project

ty has approved it, the project design document can cite design document;
it as evidence that the project’s impacts have been ■ Provide a summary of the comments received; and

assessed and accounted for. ■ Review comments received and provide a report,

demonstrating how relevant concerns were

STAKEHOLDERS COMMENTS
A final requirement of the project design document
phase is that local stakeholders be invited to comment
on it. Stakeholders include individuals, communities,
or other groups, such as NGOs, who may be affected by
the project. The project design document must include
a description of the process for public comments. A spe-
cific format for submitting contacts and results of the
addressed. This report has to be submitted for valida-
tion by the designated operational entity.
This local stakeholders consultation process is dis-
tinct from the invitation for comments from stakehold-
ers by the designated operational entity during the
project validation phase. At that time, international
stakeholders, such as NGOs, have an opportunity to pro-
vide their comments regarding the specific CDM compo-

BOX 3.9: CREATING A STAKEHOLDER CONSULTATION

In the absence of further experience and guidelines, the following process could be applied in cases where a significant group of
stakeholders outside the project participants is likely to be impacted. The project developer should:
1. Identify all local stakeholders affected or likely to be affected by the CDM project activity. These should include individuals,
groups and/or communities.
2. Devise a programme, which could include written and/or verbal explanation of the CDM, a description of the project and its
probable impacts and an explanation of the project design document.
3. Invite the identified stakeholders for comments. This can be done by placing an advertisement in at least one local newspaper
and invitation to stakeholders to provide written comments. The invitation should include the following information or state in
the invitation that it is available upon request;
■ Information describing the JI/CDM mechanisms;
■ The project design document; and
■ Information on the potential impact of the CDM project on the stakeholders.
4. Record all responses. This can be accomplished either through minutes of the stakeholder meeting or in a written summary
that identifies and responds to the main issues raised and includes contact information of the respondents.
5. Produce a written report on the consultation exercise for the CDM project validator. Written and verbal responses should be
included in the final report. The report should present comments from the local participants including objections or support for
the project and clearly indicate the agreed measures to be undertaken by the developer to alleviate the concerns of the local
participants. Contacts for participants should be provided.
In many host countries, project developers may find it difficult to define the constituency for the selected projects.
Developing a knowledge base at the national level for this purpose could be a valuable asset in maintaining transparency and
creating a pipeline that reflects national priorities for sustainable development.

46
 CHAPTER 3: DEVELOPING THE PROJECT DESIGN DOCUMENT
From the perspective of keeping future
expenditure under control, it is important
that the monitoring plan makes future
verification as simple and cost-effective
as possible.
nents of the activity. In contrast to local stakeholders,
the international stakeholders are not actively
approached. They are simply given the opportunity to
review the project design document on the web. The
rationale is that concerned members of the internation-
al and/or national community, especially NGOs, will
take on the task of monitoring proposed CDM projects.
Incorporating two rounds of stakeholder consultations
is intended to promote democratization of the CDM
process and allow both local and international stake-
holders to express their concerns regarding the efficacy
and appropriateness of the selected projects.
The Marrakech Accords refer to accredited NGOs,
and clearly some NGOs will be more competent than
others to provide a valuable feedback to the CDM activi-
ty in the host country.
In host countries with a clear project planning process
in place, a project developer can follow that country’s
established guidelines for public consultation and partici-
pation. However, the project developer is advised to check
with the designated national authority whether the exist-
ing rules apply to the project type and the CDM process.
Project developers are also advised to verify the rules for
public consultation, discuss with the relevant authorities
and invite comments from civil society on the project
design document. In cases where the public consultation
procedures are not established, the project developer
should design its own consultative exercise.
47
48
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE CHAP-

CHAPTER 4:

Simplified Procedures for Small-Scale Projects

The Clean Development Mechanism is potentially a way to foster sustainable development in

the host countries. It can direct investments to appropriate clean energy projects that can
strengthen the livelihoods of people in rural communities. However, the CDM’s potential in
this regard could be undermined by the high transaction costs associated with small-scale and
community-based projects relative to the likely return on investments. These types of projects
are, nevertheless, extremely important from the perspective of creating greater developmental
equity. This chapter discusses some of the strategies that could reduce transaction costs for
small-scale projects, including:

THE HIGH COST OF CO 2 MITIGATION Box 4.1: Defining small-scale projects

AND SMALL-SCALE PROJECTS Box 4.2: Eligible small-scale project
categories
REDUCING TRANSACTION COSTS
■ Streamlined procedures
■ Reduced governance costs and fees
■ Bundling
■ Standardized baselines

SIMPLIFIED PROJECT DESIGN DOCUMENT

■ Project description
■ Baseline methodology and calculation
■ Crediting period
■ Monitoring plan
■ Environmental impacts
■ Stakeholder comments
■ Validation, registration, verification
and certification
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

CHAPTER 4: SIMPLIFIED PROCEDURES FOR

SMALL-SC ALE PROJECTS

Expanding the energy services available to the rural
poor throughout the developing world is one of the cen-
tral challenges of sustainable development, one that
UNDP has been actively involved in for years. The Clean
Development Mechanism is potentially a way to assist
in this by directing investments to appropriate energy
technologies that can strengthen the livelihoods of peo-
ple in rural communities. However, the CDM’s potential
in this regard could be undermined by the high transac-
tion costs associated with small-scale and community-
based development projects relative to the likely return
on investments. Nevertheless, these projects are
extremely important from the perspective of creating
greater developmental equity. This chapter discusses
this issue and strategies to keep transaction costs down
(see also chapter 5).
Transaction costs associated with developing small-
scale projects under the CDM are high relative to the
direct emissions benefits that may be available. These
projects, while clearly appropriate from a sustainable
tested and initial experience indicates that significant
fixed costs remain, including those associated with
legal work, validation and verification. Initial transac-
tions tend to demonstrate a high fixed cost element,
and low variable cost ratio. It is expected that learning-
by-doing capacity development may lead to reducing
this differential.
THE HIGH COST OF CO2 MITIGATION AND
SMALL-SCALE PROJECTS
In the fourth quarter of 2001, UNDP carried out an
assessment of selected small-scale projects to determine
their potential for CDM participation. The assessment
unequivocally concluded that although small-scale proj-
ects have a significant ‘rural development’ component
that is not entirely captured in the objective of reducing
greenhouse gas emissions, they are expensive in terms of
cost per unit of CO2 offsets. This high cost per unit of CO2
mitigation is related to:
■ Type of technological intervention (methane projects

development standpoint and positive in terms of the tend to be economically most attractive and new
net reduction of greenhouse gas emissions, are chal- renewables tend to be the most expensive);
lenging to transact in the marketplace, due to a combi- ■ Off-grid projects are more expensive than on-grid

nation of perceived risk factors and lack of economies projects;

of scale. The CDM Executive Board has made efforts to ■ Projects in rural areas are more expensive than

reduce the transaction costs for small-scale projects by projects in urban areas; and
introducing scaled registration costs and streamlined ■ Projects in Africa are more expensive than

procedures. These procedures are only beginning to be elsewhere in the world.

BOX 4.1: DEFINING SMALL-SCALE PROJECTS

The Marrakech Accords have defined small-scale CDM projects as:

■ Renewable energy project activities with a maximum output capacity equivalent of up to 15 megawatts;
■ Energy efficiency improvement project activities which reduce energy consumption by up to the equivalent of 15 gigawatt
hours per year; and
■ Other project activities that both reduce anthropogenic emissions by sources and directly emit less than 15,000 kilotons of
CO2 equivalent per year.

50
 CHAPTER 4: SIMPLIFIED PROCEDURES FOR SMALL-SCALE PROJECTS
Unless sustainable development remains a high
priority, supported by existing and new institutional
mechanisms and creative steps to include the multiple
development aspects of small-scale projects, the current
CDM situation could evolve towards a concentration
of projects in limited middle-income countries with
a preponderance of methane-capture and utilization
projects. In the absence of simplified procedures and
modalities for evaluation of small projects, the competi-
tive position of many small-scale and community level
energy projects will be undermined because of their
ability to provide fewer credits.
The CDM Executive Board recognizes this equity
issue in the implementation of CDM and is taking
BOX 4.2: ELIGIBLE SMALL-SCALE PROJECT CATEGORIES
TYPE 1: RENEWABLE ENERGY PROJECTS:
Electricity generation by end-user
Mechanical energy for the user
Thermal energy for the user
Renewable electricity generation
for grid connection
TYPE 2: ENERGY EFFICIENCY
IMPROVEMENTS PROJECTS
Supply side energy efficiency
improvements – transmission and distribution
Supply side energy efficiency
improvements – generation
Demand side energy efficiency programmes
for specific technologies
Energy efficiency and fuel switching
measures for industrial facilities
Energy efficiency and fuel switching
measures for buildings
TYPE 2: ENERGY EFFICIENCY
Agriculture
Switching fossil fuels
Methane recovery and avoidance
action to decrease the transaction costs faced by small-
scale projects. Streamlined procedures have been devel-
oped to allow these projects to go through a simplified
process, thereby reducing their transaction costs. Some
of the procedures that have been simplified include:
■ Bundling of several similar, small-scale projects to
reduce costs and increase the efficiency of the process;
■ Simplified project design document;
■ Streamlined baseline methodologies;
■ Simplified monitoring plans; and
■ One operational entity to undertake monitoring,
verification and certification.
Since Marrakech, the CDM Executive Board has
nominated a Small Scale Panel that is responsible for
PRACTICAL EXAMPLES
Solar home systems, solar water pumps, wind battery chargers,
pico-hydro, combined heat and power.
Wind or solar powered pumps, water and windmills.
Solar thermal water heaters and dryers, solar cookers, biomass
cogeneration systems for heat and electricity.
Photovoltaics, hydro, wave, wind, geothermal, and biomass supply
that is fed to the grid.
Upgrade of voltage on transmission line, expansion of a
distribution system.
Energy efficiency improvements of power stations and
heating plants, co-generation.
Adoption of energy efficiency equipment – lamps, ballasts,
refrigerators, motors, fans, A/C, appliances.
Efficient motors, fuel switching, efficiency measures for
industrial processes.
Technical energy efficiency measures such as insulation and
fuel switching (oil to gas).
No information yet
In existing generation applications.
Methane from coal mines, agro-industries, landfills,
wastewater treatment facilities.
51
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
overseeing this process and making recommendations.
The small-scale procedures described here have been
approved by the panel, and it will be the responsibility
of the Executive Board to consider changes to existing
requirements and documentation.
Small-scale CDM project activities follow the basic
stages of the regular CDM project cycle. However, in
order to reduce transaction costs, some modalities and
procedures are simplified for small-scale CDM projects,
including:
■ Projects and project portfolios can be bundled at the
following stages – project design document, valida-
tion, registration, monitoring, verification and certi-
fication. The total size of the bundled projects must
remain within the definition of small-scale projects.
■ Reduced requirements for a project design document;
■ Simplified baseline methodologies;
■ Simplified monitoring plans and requirements; and
■ The same designated operational entity can under-
take validation, verification and certification.
In order to use these simplified procedures a pro-
posed project must meet the eligibility requirements
(see box 3.1). The proposed project activity should not
be a debundled component of a larger project and
should preferably conform to one of the project cate-
gories listed in box 4.2.
If a project is not listed, a new activity category or
revision to a methodology can be prepared and submit-
ted to the Executive Board for consideration. Although
similar across activities, the simplified baseline
methodologies are described by category.
REDUCING TRANSACTION COSTS
The number of CDM projects that go forward will be
determined partly by the magnitude of transaction
costs associated with the project development. This is
particularly pertinent to small-scale projects. The fol-
lowing aspects of the process can have a significant
impact on reducing the project development costs.
Streamlined procedures
As discussed previously, streamlined procedures have
been developed and approved by the CDM Executive
Board. See below for more information about how the
project design document has been modified.
52
Reduced governance costs and fees
Governance costs can be incurred at the national
and international levels. At the international level the
CDM executive board has already approved a tiered cost
approach for registering small projects. (The fee is cur-
rently $5,000 per year for projects with less than 15,000
tons of CO2 emissions.) In the tiered approach, some
costs are scaled according to ability and willingness to
pay. Clearer guidance at the international level is also
needed to assess the impact of costs pertaining to the
ongoing verification and certification procedures on
project viability. Streamlined verification processes, for
example through sampling (for smaller projects and proj-
ect bundles), and also reduced needs for on site verifica-
tion (favouring remote verification) will contribute con-
siderably to lower transaction costs for the small scale
projects.
Bundling
Similar small-scale projects can be bundled into one
CDM project. This means that baseline development,
monitoring plan, host country approvals and valida-
tions will apply to all projects in the bundle, resulting
in reduced costs from greater economy of scale. While
bundling has not been specifically mentioned for larger
projects, it may also be applicable to them. This would
however depend on the project circumstances and
would have to be assessed on a case-by-case basis.
Standardized baselines
Another significant development is the development
and approval of standardized baselines for small-scale
projects. Project developers in recognized sectors may
save themselves time and effort by using these base-
lines. Such top down baselines may be extremely valu-
able in sectors likely to see similar projects and will be
of great benefit to smaller project developers. Candidate
sectors include:
■ On and off-grid electricity;
■ Animal manure management (for biogas purposes);
■ Afforestation and reforestation;
■ Transport fuel switches; and
■ Energy efficiency projects.
 CHAPTER 4: SIMPLIFIED PROCEDURES FOR SMALL-SCALE PROJECTS
SIMPLIFIED PROJECT DESIGN DOCUMENT
The project design document for small-scale projects
has been simplified as follows:
Project description
This section is virtually identical to that for larger
projects, except that the project type and category
should be selected from the above list of eligible
projects. No explanation is required concerning why
the reductions would not occur in the absence of the
project. This section should confirm that the project
is not a ‘debundled’ portion of a larger project.
Similar small-scale projects can be
bundled into one CDM project.
Baseline methodology and calculation
This section is also similar to that for larger projects,
with the exception that the baseline methodology
choice is based on simplified methodologies by project
category. Moreover, for some project categories a pre-
defined baseline can be applied. The UNFCCC/CDM site
on baseline methodologies for small-scale projects1
may be helpful in deciding if a suggested baseline is
applicable to the proposed project.
In the section asking for evidence that the project is
additional, a list of possible choices is provided. The
barriers that would have prevented the project from
happening include:
■ Investment barrier – a financially more viable project
would have been selected that would emit more green-
house gas;
■ Technological barrier – a less advanced technology
with lower risks would have been selected and led to
higher emissions;
■ Barrier due to prevailing practices – existing regulato-
ry or policy requirements would have led to selecting
a technology that emits more; and
■ Other barriers – these are left up to the project devel-
oper but may include institutional barriers, limited
information, or lack of managerial resources, organi-
1
http://cdm.unfccc.int/pac/howto/SmallScalePA/ssclistmeth.pdf
zational capacity, financial resources or capacity to
absorb technologies – all of which can lead to higher
greenhouse gas emissions.
For small-scale projects, the project boundary is
limited to the physical project activity. If the project
displaces energy supplied by external sources the proj-
ect will earn CERs from those sources. The issue of
leakage will only be considered for biomass projects.
Crediting period
This section is exactly the same for large and small-
scale projects: three, seven-year crediting periods or
one non-renewable period of ten years.
Monitoring plan
The simplified methodologies for monitoring can be
found under each project category on the CDM website.
A solar home system project, for example, is required to
complete an annual check of all systems or a sample
thereof to ensure that all systems are still operating, or
if appropriate, to meter the electricity generation. An
efficiency improvement at a power station is required
to measure energy savings by calculating the energy
content of the fuel used by the generating unit and the
energy content of the electricity or steam produced by
the unit. A standard emissions coefficient is also
required.
The requirements of the monitoring plan within the
simplified project design document are significantly
reduced since emissions outside the project boundary
need not be monitored.
Environmental impacts
A copy of the impacts on the environment if any, should
be attached only if required by the host country.
Stakeholder comments
The format for this section is exactly the same as the in
the project design document for larger projects.
Validation, registration, verification
and certification
Once the small-scale project design document is com-
pleted it can be submitted to an operational entity for
validation. The designated operational entity must veri-
fy the following:
■ The participation requirements of the CDM modalities
53
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
In the case of small-scale projects, the same
operational entity may be used for both
verification and certification of CERs.
and procedures have been met;
■ Comments from stakeholders have been invited and a
summary provided;
■ Environmental impacts, if required by host party, are
included;
■ Project will reduce emissions of greenhouse gas;
■ Project fits within selected project category;
■ Project conforms to all procedures not replaced by the
simplified procedures.
54
The designated operational entity must solicit com-
ments over a 30-day period after which time the valida-
tion can be confirmed or denied. If approved, the desig-
nated operational entity shall register the project with
the CDM Executive Board.
The agreed to monitoring plan shall be executed and
submitted to the designated operational entity. In the
case of small-scale projects, the same operational entity
may be used for both verification and certification
of CERs. Finally, the Executive Board will issue the
verified CERs.
Additional information is available at
http://cdm.unfccc.int/pac/howto/SmallScalePA/index.
html.
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE CHAPTER 5:

CHAPTER 5:

Transaction Costs, Efficiency and Supportive Governance

High transaction costs can not only lower the value received by the host countries but can also
reduce the degree of utilization of CDM. The costs of implementing CDM projects will likely
decrease over time as a result of learning curves. However, several institutional arrangements
can keep CDM transaction costs down even in the early stages of its implementation. This
chapter first provides an introduction to transaction costs and their implications on project
feasibility. It then examines ways in which the CDM can be efficiently managed by host country
governments, if capacity in this area can be strengthened.

ESTIMATING TRANSACTION COSTS
AT THE PROJECT LEVEL
■ Project design costs
■ Other CDM costs
■ Other potential costs
TRANSACTION COSTS AND PROJECT FEASIBILITY
HOST COUNTRIES’ RESPONSIBILITIES
IN MANAGING THE CDM PROCESS
THE CRITICAL ROLE OF THE DESIGNATED
NATIONAL AUTHORITIES
■ Structuring CDM authorities
■ Potential regulatory roles
■ Host country support functions
Figure 5.1: CDM institutions and project cycle
as defined by the Marrakech Accords
Figure 5.2: Two-tiered institutions
Box 5.1 The UK Climate Change Projects
Office for External CDM Support
Box 5.2: Critical areas for building
institutional capacity
Box 5.3: South-South learning by doing
Box 5.4: Sample of Letter of Approval
Table 5.1: Transaction cost estimates
Table 5.2: Revenue and up-front transaction
costs for typical small-scale and
large projects
Table 5.3: Reasons for involvement from
various ministries

CURRENT STATE OF DEVELOPMENT OF

HOST COUNTRY CAPACITIES

TRANSPARENCY IN THE CDM PROCESS

CDM AND SUSTAINABLE DEVELOPMENT

 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
CHAPTER 5: TRANSACTION COSTS, EFFICIENCY
AND SUPPORTIVE GOVERNANCE
The Clean Development Mechanism has the potential to
redirect considerable investments into new technolo-
gies, energy conservation, fuel switching and carbon
sequestration. Precisely because so much is at stake –
not only investments, but also the development paths
of many countries and the world’s ability to effectively
address climate change – many safeguards and checks
have been built into the CDM project cycle. The goal is
to make the CDM live up to its promise. Host country
governments have crucial roles to play, both as regula-
tors to ensure that the CDM fulfills its objectives, and as
promoters, to ensure that projects that can help their
countries can attract investors and can get through the
project cycle.
Even with supportive governance, the process of
getting emission reductions to the point of certifica-
tion may be lengthy and cumbersome, and the associat-
ed transaction costs may often be high. Transaction
costs will be incurred in the creation, alteration, pro-
tection or enforcement of property rights for carbon as
a commodity. High transaction costs can not only lower
the value received by the host countries but can also
reduce the degree of utilization of CDM. The costs of
implementing CDM projects will likely decrease over
time as a result of progress on the learning curve.
However, several institutional arrangements can keep
CDM transaction costs down even in the early stages of
its implementation. Most host countries will need to
build their institutional capacities considerably to
achieve this. Following a discussion of transaction costs,
this chapter examines ways in which the CDM can be
efficiently managed by host country governments.
ESTIMATING TRANSACTION COSTS
Transaction costs are part of almost any trade or invest-
ment. In economics theory, the price of a commodity is
1
The breakdown of transaction costs used here were borrowed from a background paper prepared by Jiahua Pan for the UN Foundation project on Capacity Building in China:
“Transaction Costs For Undertaking CDM Projects.”
2
A fund established by the UNFCCC to help vulnerable countries adapt to the effects of climate change.
56
at an equilibrium when it equals the marginal cost of
production. However, in order to get the product from
the producer (seller) to the consumer (buyer), there are
often additional costs beyond the production. These may
include costs of – or of time lost during – negotiations
and regulatory processes, as well as legal or banking
fees and opportunity costs, among others. Transaction
costs include expenditures that are over and beyond
production costs.
Transaction costs raise the price of a product beyond
the marginal cost of production, thereby reducing
demand for the product. Transaction costs associated
with the CDM can be incurred at the project level, the
national level and the multilateral level1. These may
include:
Project design costs
For any CDM project, the project developer is obliged
to prepare a project design document and submit it for
approval. Costs that are incurred in the process include:
■ Costs prior to project document preparation, such
as communicating with government; and
■ Cost of project document preparation, either by
the developer or contracted out to a consultant firm
or an intermediary specialist.
Other CDM costs
The CDM Executive Board may impose additional costs
on companies involved in the CDM to be generated from
proceeds of CDM projects, some of which may not be
directly related to the project, but rather reflect costs
associated with implementing the Kyoto Protocol.
For instance:
Adaptation: Two per cent of CDM project proceeds
will be levied for use as an adaptation fund2 except
in the case of the least developed countries. For all
other projects, this levy is compulsory.
 CHAPTER 5: TRANSACTION COSTS, EFFICIENCY AND SUPPORTIVE GOVERNANCE

CER validation, verification and certification costs: It for example, may levy the sharing level at the rate of
appears these costs are coming down as designated its domestic value added tax). Insurance services to
operational entities are recognizing that the process ensure delivery of contracted CER, or the opportunity
is becoming more straightforward. cost of holding back CERs to create a self-insurance
Executive Board administrative costs and registration fees: buffer may also add to the tranasaction costs.
The Executive Board has set a series of costs for project Transaction costs and project feasibility
registration, in accordance with the size of the individual Clearly, transaction costs that are high relative to total
projects: costs can reduce the project’s feasibility. The value of the
CERs generated must be significantly higher than costs
Tons per year Registration fees per year associated with the transaction in order to make a proj-
Less than 15,000 $5000 ect worthwhile. Transaction costs are particularly prob-
Between 15,000 $10,000 lematic when the volume of CERs being offered is rela-
and 50,000 tively low or when the price is very low. Transaction
Between 50,000 $15,000 costs that may kill a project at a market-clearing price of
and 100,000 $2.50 a ton may be perfectly acceptable if the market
Between 100,000 $20,000 price is $7.50 per ton.
and 200,000 Examples set out below in table 5.1 demonstrate how
More than 200,000 $30,000 transaction costs affect investment decision-making.
These costs reflect the use of an international carbon
Other potential costs consultant, since there are currently few national
Some host countries also require sharing of CERs experts. Aggregated transaction costs are currently aver-
(several countries levy this in the form of a tax; Chile, aging about $200,000 per project. This is directly related

TABLE 5.1 TRANSACTION COST ESTIMATES

CDM PROJECT CYCLE CARBON TRANSACTION CONSULTANT’S

ESTIMATE OF COST (IN US$)
UP-FRONT (PRE-OPERATIONAL) COSTS:

1. Feasibility assessment 5,000-20,000

2. Preparation of the project design document 25,000-40,000
3. Registration 10,000
4. Validation 10,000-15,000
5. Legal Work 20,000-25,000
TOTAL UP-FRONT COSTS: 70,000-110,000
Operational Phase Costs:
1. Sale of CERs Success fee in region of 5-10 per cent of CER value. Higher for a
small project than a large project.
3
2. Risk mitigation 1-3 per cent of CER value yearly. Mitigation against loss of incremental
value as a consequence of project risk.
3. Monitoring and verification 3,000-15,000 per year 4.

Source: EcoSecurities, 2003

3 Risk mitigation fees: the potential fee a developer may wish to incur so as to insure against non-delivery of contracted CERs. (This could take the form of a specific insurance,
a product which is only now emerging in the market)
4
It is not clear yet exactly how the burden for monitoring and verification will be realized, costs will be incurred if on site verification is mandated, vs. remote verification for
example.

57
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

to the fact that most projects are unique and are on the
steep part of the learning curve – transaction costs are
expected to decline as participants gain more experience
with the process. Finally, different project types will
incur different costs. Most experience to date has concen-
trated on supply-side generation projects, and this will
be the focus of the following transaction cost analysis.
When considering the financial viability of a proj-
ect, lenders and investors are particularly interested in
assessing the cash flows over the first few years of oper-
ation. Below is an examination of the financial impact
of the first five years of CER transaction costs, relative
to the revenues over that period, for a small-scale and
a large-scale project. The analysis concentrates on the
pre-operational costs, as the operational transaction
costs will only be relevant if the project is considered
viable based on pre-operational costs. Operational costs
are discussed later in this section. Table 5.2 is based on
the following assumptions:
1. Total cost estimates for the pre-operational phase are
between $70,000 and $110,000.
2. A typical small project (2MW biomass plant, 20-year
lifetime, resulting in reductions of 35,000 tCO2/yr) and
a large project (150MW gas plant, 20 year lifetime,
resulting in reductions of 350,000 tCO2/yr) are used to
compare the impact of the up-front costs:
3. CERs are purchased at $3.00 tCO2 in present value
terms, a reasonable mid-range price
4. Values are over the first five years of operation, and
discounted to present value at 6 per cent per annum.
Generally project developers would expect transaction
costs related to a CDM project (expressed as a percent-

TABLE 5.2: REVENUE AND UP-FRONT TRANSACTION COSTS FOR TYPICAL SMALL-SCALE AND LARGE PROJECT
[TONS CO2 PER YEAR]

SMALL PROJECT

TOTALS ANNUAL EMISSIONS REDUCTIONS

(PRESENT VALUE) (TONNES CO 2 PER YEAR)
CERS (TCO 2 ) 156,279 35,000
PRESENT VALUE $468,836 $105,000
(Price $ 3 TCO 2 ) (Discounted at 6 per cent)

NET REVENUES $410,120 $91,850

TRANSACTION COSTS $57,000 $90,000

NET PRESENT VALUE BETWEEN $373,120 $345,12

LARGE PROJECT
CERS (TCO 2 ) 1,562,787 350,000
PRESENT VALUE $4,688,361
(Price $ 3 TCO 2 ) (Discounted at 6 per cent) $1,050,000

NET REVENUES $4,503,059 $1,008,500

TOTAL UP-FRONT COSTS BETWEEN $57,000 $90,000
NET PRESENT VALUE $4,466,059 $943,500
BETWEEN

TRANSACTION COST SUMMARY SMALL PROJECT LARGE PROJECT

UP FRONT COSTS AS A PER CENT OF NET LOW COST 13 per cent 1.2 per cent
PRESENT VALUE OF EMISSION REDUCTIONS

Source: EcoSecurities, 2003

58
 CHAPTER 5: TRANSACTION COSTS, EFFICIENCY AND SUPPORTIVE GOVERNANCE

age of the potential value it creates) to be consistent
with the level of transaction costs in other kinds of
projects. Given the risks inherent in securing CER
value, it would not be worthwhile to undertake the
CDM process – or for that matter, any other project – if
the costs outweigh the benefits. In conventional rev-
enue streams, developers generally expect up-front costs
to be no more than 5-7 per cent of the net present value
of the revenue. In our example, the up-front costs –
1.2-2 per cent – for the large project are well within this
range. On the other hand, the transaction costs for the
small project – from 14-22 per cent – would not be ten-
able, particularly given the inherent risks that no
transaction occurs. The CDM Executive Board has made
efforts to reduce the transaction costs for small-scale
projects by introducing scaled registration costs and
streamlined procedures (see chapter 4).
However, in some projects, the CER value can repre-
sent nearly pure profit, which would make a higher
level of transaction costs – and risk of achieving them –
acceptable. For the purpose of this analysis, we focus on
a conventional transactional scenario. Consequently,
the transaction costs represent monies at risk, at the
point when a project confronts the greatest risk, that is,
during the pre-operational phase and prior to generation
of any revenue.
Based on both assumptions (5-7 per cent threshold
for up front costs and a price of $3 per ton CO2) it is
then possible to determine the minimum amount of
CERs that have to be generated by the project for it to
be viable. In our example, the minimum quantity of
reductions is about 75,000 tCO2 per annum for a total of
up-front transaction costs of $57,000. When costs are
higher ($90,000) the amount of CERs would need to be
at least 105,000 tCO2.
The above analysis does not take into account the
operational costs, or other potential costs – such as an
adaptation levy and administration charges. These are
not ‘at risk’ costs as they are only paid if the project
is implemented. These costs will also have to be consid-
ered before a final decision can be made about the
viability of a CDM project.

FIGURE 5.1: CDM INSTITUTIONS AND PROJECT CYCLE AS DEFINED BY THE MARRAKECH ACCORDS

Source: Adapted from Axel Michaelowa, ‘Host Country Requirements to Make the CDM Process Nationally Efficient,’ UNDP internal discussion paper, April 2003.

59
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
HOST COUNTRIES’ RESPONSIBILITIES IN
MANAGING THE CDM PROCESS
As the CDM is a market mechanism, economic efficien-
cy is a precondition for it effectiveness. However, as a
new and complex process with many built-in checks
and safeguards, the CDM can, in principle, be expensive
to transact, requiring various layers of institutional
involvement, as shown in figure 5.1.
Experience from Activities Implemented Jointly
shows that the few countries that built up effective
institutions were able to attract a significant share of
total AIJ project activity. In many developing countries
a critical element of attracting investments hinges on
capacity development and institutional strengthening
to address limitations in the CDM implementation and
governance regimes resulting from relatively weak
administrative structures. This ideally would lead to
transparency, efficiently administered policies, laws
and regulations, accountability and participation of
diverse stakeholders.
To participate in the CDM, both host and investor
countries have to establish a designated national authori-
ty for project approval. Investor countries also have to
define rules and institutions for project approval. Host
countries should closely follow these developments in
Annex I countries, especially in those with which they
have strong economic and cultural ties.
For most host countries, CDM activities are novel,
intricate, and involve stakeholders at the international,
national and local levels. Managing and directing these
diverse interests is not simple and requires clear com-
prehension of demand and an understanding of legal
and contractual requirements and CDM rules, as well as
project and process coordination. Above all, it requires
a transparent process.
Prerequisites for participation in the CDM for host
countries include:
■ Ratification of the UNFCCC;
■ Ratification of the Kyoto Protocol; and
■ Designation of a national authority for project
approval and appointment of a focal point for the
UNFCCC and Kyoto Protocol.
Determining sustainable development criteria for
CDM projects is the prerogative of the host country.
60
Depending on national circumstances, the host country
government can also take responsibility for overseeing
and managing a variety of further interactions with
the market. Those countries that seek active involve-
ment in the CDM will likely be actively engaged in the
some of the following:
■ Development of a national policy and regulatory
framework to promote CDM transactions;
■ Policy development, including setting sustainable
development priorities;
■ CDM project approval and registration;
■ Management of CERs retained by the country as part of
domestic credit sharing arrangements, as applicable;
■ Participation in ongoing Kyoto Protocol negotiations;
■ Encouraging the development and selection of quali-
fied local operational entities
■ Information exchange, marketing and promotion;
■ Supporting capacity development; and
■ Encouraging project development.
THE CRITICAL ROLE OF THE DESIGNATED
NATIONAL AUTHORITIES
UNDP’s experience and that from other early partici-
pants in this area suggests that CDM processes will
incur prohibitive transaction costs in the absence of
effective host country capacity to competently address
issues relating to project approval, coherently articulat-
ed national sectoral priorities and transparently
defined sustainable development criteria. These issues
are the primary responsibility of the host country’s des-
ignated national authority, or DNA, in accordance with
the participation requirements under CDM rules. The
key regulatory requirement for developing countries is
in the establishment and ongoing capacity enhance-
ment of these designated national authorities. This
national authority is the key entity in the host country
that will be involved with CDM, and is the body respon-
sible for ensuring that the host country maintains con-
trol over the CDM projects executed in its country. The
designated national authority is empowered to issue
relevant endorsements and host nation approvals and
to review all relevant national regulatory aspects
regarding CDM projects. Specifically, the designated
national authority has the final legal responsibility to
 CHAPTER 5: TRANSACTION COSTS, EFFICIENCY AND SUPPORTIVE GOVERNANCE
approve the transfer of project-related performance
into the international system of CERs.
The designated national authority also has the
important responsibility of ensuring that individual
projects meet the host country’s overall sustainable
development objectives. The host countries are increas-
ingly aware of the need to have clearly defined sustain-
able development criteria that will allow them to
explore the ability of CDM activities to address the
needs of the poorest segments of the population. These
criteria are likely to vary from country to country. For
instance, in many least developed countries, delivering
energy services to rural populations could be a great
benefit, and reduce greenhouse gas emissions associated
with a reliance on wood fuels. Many countries could
benefit from reforestation efforts. Countries with sub-
stantial coal resources and significant levels of poverty
may be very receptive to project using cleaner coal tech-
nologies for power generation. And countries with ener-
gy-intensive industries may be very eager to ‘leapfrog’
to more efficient and cleaner new technologies.
Ideally, the designated national authority will arrive
at the sustainable development criteria in a participatory
manner and make the criteria widely available.
Transparency in this will provide a positive signal to the
private sector and also will guide developer on the kinds
of projects that are likely to gain approval easily.
STRUCTURING THE CDM AUTHORITY
A number of countries have confirmed their designated
national authorities to the CDM Executive Board.
Lessons from successful AIJ host countries highlight
that an independent single unit responsible for the
solicitation and approval of projects is helpful. Such an
arrangement – which can potentially be run by civil
society or the private sector and audited by the state –
has been found to minimize the undesirable effects of
conflicting interests. Alternatively, in some instances
the national political and bureaucratic imperatives may
be better served by a two-tiered structure. The govern-
ment ministries with interest and relevance to the
national CDM process may constitute a national CDM
board that defines the host country criteria and priori-
ties. A separate secretariat, with predominant involve-
ment of other civil society and/or private sector evalu-
ates proposals and works with the national board for
their approval and implementation.
Accordingly, national authorities may fall into two
main types: a purely independent body and a two-tiered
structure. Generally, the designated national authority
will be a team of individuals, based in one government
ministry and receiving input from others. It will be
based in different ministries in the different host coun-
tries. While the preferred ministry as the managing
agency will be determined by the national circum-
stances, it will be useful to include representatives
from the ministries of energy, environment, natural
resources and the more commercially focused min-
istries of trade.
The designated national authority may take the
form of a new inter-ministerial committee or of an
entirely independent body. In principle, the national
authority function can sit outside direct government
control, that is, in quasi-government organizations that
may not be answerable to any one ministry. However,
this has to be considered very carefully, and the neces-
sary competencies and terms of reference should be
clearly defined.
The UNFCCC web site (http://cdm.unfccc.int/) main-
tains a list of designated national authorities in those
countries that have established them. UNDP is also
planning to share experiences of different countries in
establishing DNAs.
Several ministries will have a direct interest in
being designated as the CDM national authority, or
being part of it, for reasons indicated in table 5.4.
Potential regulatory roles
As the designated national authority is responsible for
regulation of CDM projects, it should interact with the
other government agencies and project developers
throughout the project identification, development and
approval process. Key roles in relation to the project
development process include:
■ Seeking preliminary advice on likely project
suitability from relevant government agencies;
■ Streamlining the CDM approval process at the host
country level;
■ Ensuring that the CDM project goes through the
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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

TABLE 5.3: REASONS FOR INVOLVEMENT FROM VARIOUS MINISTRIES

MINISTRY REASON FOR CDM INVOLVEMENT

Environment Officials often act as lead negotiators in the UNFCCC and have expertise in the areas of
climate change and environment
Energy A significant number of projects may be in the energy sector
Agriculture A significant number of projects may be in the agriculture sector
Natural Resources A significant number of projects may impact on the national resource base
Transport Some nations may favour projects in the transport sector (several AIJ projects focused on this area)
Treasury Treasury officials may wish to manage the fiscal implications of the CDM (especially since
CERs may come to be seen as a national asset)
Foreign Affairs Given the international nature of the Kyoto Protocol, the CDM may have implications for diplomats and
foreign ministries in managing external relationships and partnerships

relevant international processes and has all the
relevant documentation (i.e. audited baseline and
verification arrangements) to proceed;
■ Setting clear and transparent sustainable develop-
ment criteria for CDM projects;
■ Setting criteria for local stakeholder consultation and
for assessing a project’s contribution to sustainability;
and selection of technology options; and
■ Establishing a system for registration of emission
reductions.
Developers should check the status of a host country
in terms of meeting eligibility criteria for the CDM. If a
country did not ratify the Kyoto Protocol, projects with-
in its borders will not be eligible under the CDM. The
risk of starting a CDM project in a country that is not
a Party to the Kyoto Protocol is borne by the project
developer. It is strongly recommended, therefore, that
developers obtain some form of host-country approval
or indication, which would state that the country
under consideration has the intention – or is preparing
– to become a Kyoto party before continuing.
It can be assumed that the country is seriously
interested in obtaining such status if it has:
■ Set up, or is in the process of setting up, a CDM office;
■ Been involved in the AIJ pilot phase; or
■ Provided national communications to the UNFCCC;
and/or appointed a national focal point for climate
change.
Host country support function(s)
Experience from the more successful AIJ hosts shows
that a single unit responsible for the solicitation of
investment and approval of projects can be extremely
effective. However, with CERs becoming compliance
instruments to meet domestic regulations in Annex I
(B) countries, a potential conflict of interest may occur
between the investment promotion and project over-
sight functions.
Therefore, countries would be well advised to
make a clear distinction between the regulatory functions
(including setting national priorities and the approval
process) and the support functions to encourage project
development. Conflicts of interest may be particularly
acute if the designated national authority is not under
the control of a single ministry or the government
itself. This can occur when the promotion agency also
offers various regulatory services.
In some countries the two functions may reside side
by side within the same government agency. In others,
the support functions might be housed in agencies
charged with investment and trade promotion, while
the regulatory component might fall under a number of
agencies, depending on circumstances. In the two-
tiered institutional approach described in figure 5.2,
the designated national authority, which would be pri-
marily responsible for regulatory functions, is repre-
sented by the national CDM board, while the secretariat
would handle promotional functions.

62
 CHAPTER 5: TRANSACTION COSTS, EFFICIENCY AND SUPPORTIVE GOVERNANCE
FIGURE 5.2: TWO-TIERED INSTITUTIONS
Source: Adapted from Axel Michaelowa, ‘Host Country Requirements to Make the CDM Process
Nationally Efficient’, UNDP internal discussion note, April 2003.
BOX 5.1: THE UK CLIMATE CHANGE PROJECTS OFFICE FOR EXTERNAL CDM SUPPORT
The United Kingdom has substantial interests both in hosting
greenhouse gas mitigation projects (in this context called Joint
Implementation projects) and in promoting external projects
with UK content. In 2001, the UK government set up a pro-
ject’s office called Climate Change Projects Office. The unit sits
across two government departments and is a joint Department
of Trade and Industry and Department of Environment, Food
and Rural Affairs team (www.dti.gov.uk/ccpo).
It is expected that the designated national authority will
ultimately reside in Department of Environment Food and
Rural Affairs and will endorse the UK’s involvement in proj-
ects, as the investing or hosting party. The Climate Change
Projects Office is commercially focused, and is intended to
maintain some distance from the Department of Environment,
Food and Rural Affairs. The Department of Trade and Industry
brings a commercial outlook intended to secure advantage in
the project development field, and also ensure that projects
developed by UK firms are able to effectively engage the
CDM. The UK aims to offer support in a number of areas,
including:
■ Maintaining a database of consultants, equipment suppli-
ers, technical, legal and financial services providers – all
vital to the project development process;
■ Actively supporting the development of JI/CDM projects
overseas and in the UK by providing support through the
greenhouse gas project cycle;
In terms of supporting project development, key
areas of responsibilities under the support function
could include:
■ Clarifying and communicating host country policy
and processes for development and submission of
CDM projects for approval;
■ Supporting project developers through the CDM proj-
ect development process (including baseline develop-
ment, validation, host country approval);
■ Facilitating the sale of CERs to buying parties;
■ Providing guidance on the steps required to prepare a
project application; and helping project promoters
take forward project opportunities;
■ Receiving and processing project applications. This
■ Support in signing relevant CDM project approvals and
endorsements (leveraging through the UK’s extensive
network of embassies);
■ Providing advice as to the ability to undertake a JI/CDM
project in the relevant host country;
■ Providing advice as to how to access buyers and overcome
the likely hurdles in the processes;
■ Increasing institutional capacity in host country govern-
ments, through the development of relevant policy and reg-
ulatory frameworks; and
■ Providing a short list of projects to be hosted in the UK and
support its designated national authority through the deci-
sion making process
The UK, as an Annex I party, is likely to import CERs. Its
experience is relevant here as the UK may act to host projects
in a Joint Implementation context, and so will have to put in
place similar institutional support as would non-Annex I coun-
tries hosting CDM projects. Besides, as mentioned earlier host
countries should closely follow these developments, especially
in countries with which they have strong economic and cultur-
al ties, to ensure that their interests are not overlooked as the
Annex I countries formulate policies relating to the flexibility
mechanisms.
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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
could include submitting the project applications to
the designated national authority for endorsement on
behalf of the project developers; and
■ Providing guidance on seeking formal approval from
the international CDM Executive Board.
Support to project developers will vary according to
circumstance, but an important function is clarifying
the process the designated national authority will use
to decide whether or not to endorse projects. Most gov-
ernments do not as yet have a coherent public policy
that explains the rationale for project eligibility and
acceptance. This can be discouraging to potential proj-
ect participants and may serve as a hindrance to project
developers. Potentially beneficial CDM projects may be
lost because of perceived – or real – risk and policy
uncertainty. In conclusion, project offices can help
reduce risk to project developers, and encourage CDM
project development by communicating a clear message,
and supporting projects through the relevant steps.
The risk of a project failing at the national level,
after considerable time and money has been spent, can
be minimized by close dialogue between project devel-
opers and the designated national authority team
throughout the project development process. In this
way, likely obstacles to endorsement can be identified
well in advance and resolved.
Host countries can also reduce transaction costs by
developing standardized baselines for larger-scale proj-
ects, if possible. Standardized baselines would require
approval by the Executive Board, and once approved,
would be applicable to all proposed projects in that
specific sector.
CURRENT STATE OF DEVELOPMENT OF HOST
COUNTRY CAPACITIES
Managing the CDM process is potentially complex
and cross cuts various sectors. Consider, for example, a
project in the sugar sector that utilizes cane bagasse to
produce energy to convert sugar to ethanol for trans-
port applications. All seven ministries listed in the
table above may claim competency to either encourage
or regulate this project. Without one clearly designated
national authority, however, problems could occur,
5 A detailed catalogue can be found in Thorne, S. and E. LaRovere (1999): Criteria and Indicators for Appraising Clean Development Mechanism Projects, Paris.
www.pelangi.or.id/database/Artikel/CriteriaPaper.doc
64
as in the following example.
Since Kyoto, some governments who have not yet
designated national CDM authorities have convened
interim committees with various stakeholders from dif-
ferent ministries, businesses, academies and NGOs. In
the Philippines, the Inter-Agency Committee on Climate
Change was created with representation from various
bodies, including the government, universities and
commercial interests, including the state-owned
Philippines National Oil Corporation. The role of such
committees is to identify, consolidate and build expert-
ise and responsibility within host countries. They can
also promote understanding of the CDM process and can
lead to strategies to efficiently manage the CDM
process, as well as to establishment of a designated
national authority
Nevertheless, even with establishment of an interim
committee, the lack of a designated national authority
created an institutional barrier in the recent applica-
tion for endorsements by two Philippines projects,
namely, CAT and Victorias, both of which have been
proposed in the sugar sector. The former received a
‘Letter of No Objection’ from the Inter-Agency
Committee on Climate Change. However, as the inter-
agency group is not the legally designated national
authority, it did not feel sufficiently empowered to
actually issue a ‘Letter of Approval’. This had important
implications when the Victorias project aimed to bid in
the recent Dutch CERUPT round early in 2002. Because
the interagency committee was not authorized to pro-
vide relevant endorsements, the developers successfully
solicited an endorsement from the Energy Secretary.
But the managers of the CERUPT tender felt this
endorsement was insufficient to proceed, as the Energy
Ministry did not have the legal footing or competency
to issue formal host country approval.
Sustainable development criteria will vary from
country to country. While investors may want to mini-
mize the number of criteria, even a large number may
not adversely impact competitiveness – if the criteria
are clear and transparent and administered in an effi-
cient manner. A reasonable approach for governments
is to choose criteria from the three fields of sustainabil-
 CHAPTER 5: TRANSACTION COSTS, EFFICIENCY AND SUPPORTIVE GOVERNANCE

ity: environmental, social and economic.5 Even though
many countries have defined criteria in the context of
the Commission on Sustainable Development’s Agenda
21, it is important to develop micro level criteria that
are based on the macroeconomic context and are easy to
use. Criteria can outline minimum threshold require-
ments or they can clearly outline the possibility of
tradeoffs between various sectors. For instance, a nega-
Understanding with developing countries. As the mar-
ket matures, governments and agencies are likely to
develop more bilateral MOUs to help facilitate the proj-
ect development and approval process and create
greater market confidence. These memorandums can
also help set out the priority areas of the host country,
and generally contain a number of key features:
■ Clear identification of the parties entering into the

tive rating in one criterion could be more than offset by agreement;

good ratings in others. ■ Affirmation of the voluntary nature of the process;

Perception of political risk in the host country can ■ Specification of a target amount of CERs to be trans-

be detrimental to attracting private sector investment. ferred. In the case of Panama, this was 20 million
One way to reduce the perception of this risk can be tons CO2 equivalent and in the case of Costa Rica, 30
accomplished is through the signing of a Memorandum million tons CO2 equivalent;
of Understanding or MOU between the investor and the ■ An agreement between the Parties to sell/purchase

host country. Such agreements serve as a tangible indi-
cation of the government’s commitment to pursue the
process and can provide great comfort to the investors.
This is an important consideration particularly when
substantial sums have been invested to develop a
CDM project and a CER stream, the success of which
is contingent on obtaining a Letter of Approval.
Both the Prototype Carbon Fund and the
Netherlands Government – currently the two largest
buyers in the market – have signed Memorandums of
CERs from projects, assuming that the country has
taken on the role of becoming a provider – effectively
an intermediary – of CERs for the buyer.
TRANSPARENCY IN THE CDM PROCESS
Transparency is a critical element of the enabling envi-
ronment that can be influenced by policies. Case studies
of foreign direct investment suggest that investors will
invest in countries if they are able to obtain reasonable
clarity about the policy environment in which they will

BOX 5.2: CRITICAL AREAS FOR BUILDING INSTITUTIONAL CAPACITY

In theory, trading in carbon offsets represents an opportunity for developing countries to attract investments that could further
national priorities of sustainable economic growth and industrial development. In practice, such trading is extremely complex
and has the potential to impact development trajectories in ways that may be unforeseen and unintended. Shortfalls in analyti-
cal and negotiating capacity in developing countries relative to their industrialized country counterparts create a very real possi-
bility that poorer countries will face unfavourable terms of trade.
Many developing countries do not fully comprehend the opportunities and limitations of carbon trading. They need signifi-
cant support to manage equitable trades and to take advantage of lessons learned of trading experiences in other commodities
and contexts. The challenge will likely be greatest for the least developed countries and small island developing states with rel-
atively low carbon emissions, weak infrastructure, and poor investment environment. UNDP advocates an efficient and enabling
environment and institutions for the countries that are producers of carbon credits to ensure that they can negotiate favourable
terms of trade as equal partners with the private sector and other buyers.
Success in implementing the CDM will require developing capacity within the designated national authorities to
■ Identify sustainable development criteria;
■ Support project development;
■ Create of an enabling environment for efficient CDM approval process; and
■ Enable host countries to enter into fair contracts with the potential buyers of carbon.

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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

operate. A clear understanding of the procedural of proposed CDM projects.

requirements that the developers must follow and the
relationship between regulatory and support agencies is
very useful. The CDM has addressed this issue by insti-
tuting a stringent process with checks and balances,
including measures for public participation.
Participation of diverse stakeholders in the develop-
ment of CDM project proposals is an important element
in maintaining transparency as well. Throughout the
project development process, parties independent from
the project developer can review the proposed project.
For example, local stakeholders, operational entities
and international stakeholders are external assessors
A large number of non-governmental organizations
are dedicated to ensuring that approved projects meet
all of requirements of the CDM and have successfully
followed the CDM project cycle. Such groups include
the World Wildlife Fund, the World Resources Institute
and CDM Watch. These NGOs are a crucial part of civil
society and can foster due diligence throughout in the
CDM process to ensure that the integrity of the Kyoto
Protocol is maintained.
CDM and sustainable human development
As CDM projects are also expected to contribute to sus-
tainable development, it is important that the CDM

BOX 5.3: SOUTH-SOUTH LEARNING BY DOING

Host countries want to ensure that they continue to pursue their own development agenda while participating in the UNFCCC
and the Kyoto Protocol. A strong interest to learn from each other by sharing information, knowledge and even technologies is
evident. Indeed, there is an enormous amount of accumulated information in the South about technologies appropriate to both
sustainable human development and to the relative reduction of atmospheric emissions.
South-south cooperation focuses on sharing experiences, information and proposals. The following are examples of two
organizations who are doing just that.
SouthSouthNorth joins the global call to reduce the growing levels of greenhouse gas emissions contributing to harmful
climate change and severely threatening the future of our planet. SouthSouthNorth recognizes the vital need for finding
viable economic solutions that are sustainable to meet this challenge and builds capacity for the success of one solution,
the Clean Development Mechanism of the Kyoto Protocol, or simply, ‘the CDM’. They invite all stakeholders and users to
participate in their project.
SouthSouthNorth creates information and technology links among southern countries and our northern counterparts to
develop the capacity to transact CDM projects to promote sustainable development and reduce greenhouse gas emissions.
SouthSouthNorth enables the exchange of information and technology within countries of the south and between these coun-
tries and countries of the north. (Excerpted from www.southsouthnorth.org)
CDM SUSAC for Africa, Caribbean and Pacific Countries To achieve investment under the CDM, the Africa, Caribbean and
Pacific countries need to streamline their efforts to attract foreign investors. Putting in place national clearinghouse agencies to
identify, verify, certify and monitor investments and emissions will go a long way in doing this.
While CDM represents one of the best opportunities for dramatically altering the development paradigm, there will be con-
siderable international competition among developing countries for attracting investment under CDM. Only those countries best
prepared, best mobilized, with the most dynamic, streamlined project identification, authorization, verification and monitoring
procedures will attract and ‘capture’ such investment.
It will take fast action in the development of local capacity and transparent identification, verification and monitoring proce-
dures for the Africa, Caribbean and Pacific countries to not only be at the front of the queue for CDM investment, but to actual-
ly lead the developing world. The CDM Susac project aims specifically to put in place all the necessary mechanisms for this to
occur and it adopts a learning-by-doing, fast track approach over its two year life.
(Excerpted from http://cdmsusac.energyprojects.net/

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 CHAPTER 5: TRANSACTION COSTS, EFFICIENCY AND SUPPORTIVE GOVERNANCE
encourages projects and processes that advance a broad-
er range of development goals, as well as efficient emis-
sions reductions. Three major areas that will assist in
this endeavor are:
■ Emphasizing small scale projects;
■ Seeking out projects that enhance human
development; and
■ Uncovering opportunities for South-South
knowledge transfer.
The designated national authority has the
important responsibility of ensuring that
individual projects meet the host country’s
overall sustainable development objectives.
The ability to achieve sustainable development will
be improved through small-scale and community devel-
opment projects in the CDM market (see chapter 4).
In addition to working toward transparency in the
CDM process, a growing number of organizations are
working to ensure that the CDM contributes to sustainable
development while reducing greenhouse gas emissions.
Their major emphasis thus far has been on lobbying
against projects that will negatively affect local communi-
ties and those projects that seem to fall short of meeting
the additionality criteria. Examples of two such organiza-
tions are the World Wildlife Fund and CDM Watch.
The World Wildlife Fund launched the Gold Standard
(see annex 2) at COP-8 in New Delhi. The project was
completed in collaboration with a range of environmen-
tal, business and governmental organizations. The
standard sets forth criteria for projects carried out under
the CDM that will ensure that the projects contribute to
sustainable development benefits.
CDM Watch is a non-profit organization that moni-
tors CDM projects and provide a clearinghouse for infor-
mation on CDM projects and CDM related issues and
developments. The focus thus far has been on ensuring
that projects are truly additional and sustainable.
Additional information is available at
www. cdmwatch.org.
UNDP supports activities and projects in the devel-
oping world that promote sustainable development.
UNDP’s strategy highlights bringing together the goals
of the CDM and sustainable development and imple-
mented in a manner that upholds the integrity of the
UNFCCC and the Kyoto Protocol.
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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

6
BOX 5.4: SAMPLE OF LETTER OF APPROVAL

6 © International Bank for Reconstruction and Development. This document may be freely used, copied and distributed for non-commercial purposes on the condition that each
copy shall contain this copyright notice.

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 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

CHAPTER 6:

CDM Transactions: A Review of Options

The Clean Development Mechanism’s dual goals of supporting sustainable development

while creating cost effective greenhouse gas emission reductions can be achieved only via
carefully structured contracts. Although all contracts can be complicated, CDM transactions
offer particular challenges, as the parties often have extremely different business and cultural
perspectives. This chapter describes various ways in which contracts to buy and sell CERs can
be structured, and examines various risks associated with the CER transactions and how to
minimize them:

STRUCTURING TRANSACTIONS Box 6.1: UNDP’s position on carbon trading

■ Upfront payment for future stream of CERs
■ Forward contract for delivery of CERs
at fixed prices
■ Forward contract for delivery of CERs
at floating prices
■ Option payment for future delivery of CERs
■ Spot market trades

CONTRACTING ISSUES
■ Delivery risk
■ Timing risk
■ Counter-party credit risk
■ Country risk and currency risk
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

CHAPTER 6: CDM TRANSACTIONS: A REVIEW OF OPTIONS

The Clean Development Mechanism’s dual goals of fund-
ing sustainable development while creating cost effec-
tive greenhouse gas emission reductions can be
achieved only via carefully structured contracts.
Although all contracts can be complicated, CDM transac-
tions offer particular challenges, as the parties often
have extremely different business and cultural perspec-
tives. Purchasers of CERs will often be large, sophisti-
cated multinationals with significant experience in
project finance, commodity and derivative transactions.
While some CER sellers will be multinationals as well,
the sustainable development component of the CDM
means local energy developers, community groups
and even NGOs may end up as counter-parties. These
smaller and less sophisticated sellers will likely require
support to ensure that they engage in equitable contrac-
tual arrangements.
In order to successfully execute a CDM transaction,
the buyer and seller need to reach agreement on an
appropriate structure for the transaction and an appro-
priate contract for the transaction. The structure of the
transaction specifies the timing of cash payments by
the buyer and the timing of CER deliveries by the seller.
It is important that the legal agreement protect both
the buyer and seller from the risk of non-performance
by the other party. This chapter examines various ways
of structuring CDM transactions that may be appropri-
ate and help minimize risks in different situations.
STRUCTURING TRANSACTIONS
The details of how CERs generated by the CDM are
exchanged can vary widely. However, several basic
structures for transactions have already emerged.
Upfront payment for future stream of CERs
When projects to demonstrate efficient reductions in
CO2 emissions were first initiated in the late 1980s and
early 1990s, most used an investment modality in which
purchasers of emission reductions would pay either the
entire project cost, or the incremental improvement
cost, at the outset of the project. Many of these projects
were developed by local NGOs from developing coun-
tries, few of which were in a position to carry invest-
ments themselves. A great number of the early projects
were land conservation projects with high upfront
acquisition costs and low ongoing operational costs.
Earlier, more rigid interpretations of additionality,
were thought to mean that projects could only claim to
be additional (and therefore receive the benefits) if the

BOX 6.1: UNDP’S POSITION ON CARBON TRADING

UNDP believes that developing countries must be empowered to negotiate effectively for fair market rules and high quality
investments and technology under emerging market-based policies for addressing global climate change. Trading in carbon
emission credits is a part of international agreements designed to combat climate change, thus effectively creating a new
‘commodity’ in international trade – one that is increasingly produced in the developing countries and consumed by more indus-
trialized countries. International traders in this new commodity of carbon offsets should learn from the lessons gleaned from
patterns of other globally traded commodities produced by the developing and less developed countries. UNDP advocates
capacity development in all aspects of relevant human, institutional and system-wide issues and the creation of efficient and
enabling environment and institutions for the developing countries that are producers of carbon credits. This will ensure that
they have favourable terms of trade and ability to negotiate with the private sector and other buyers as equal partners.

70
 CHAPTER 6: CDM TRANSACTIONS: A REVIEW OF OPTIONS
project could not have occurred without the participa-
tion of the investor entity. This was clearly easiest to
prove if lump sums were made available by the investor
at the outset. Obviously, from the perspective of devel-
oping country project developers, this upfront invest-
ment model was extremely attractive. As the carbon
commodity was not fully defined at either the domestic
or international level, the required performance was
delineated via bilateral contracts between sellers and
buyers. Failure to perform was difficult to quantify or
qualify, as few – if any – credits were evaluated by reg-
ulators in a compliance context.
Many developers/sellers still consider this to be the
natural form of emission reduction transaction.
Naturally, many project developers – especially NGOs who
want to participate in the CDM market – still want to
have substantial revenue paid up front. However, while
some investors are willing to put money into a project at
the outset, they usually seek to mitigate their risk by get-
ting project equity in return, as well as carbon credits.
CER buyers who are strictly looking for returns on
investments seek to put as little upfront cash at risk as
possible. Buyers strongly prefer the forward contract/pay-
on-delivery model (see below), whereby payments are
only made after credits are fully validated, certified, reg-
istered and transferred. This leaves it up to project devel-
opers to find ways to take the financial commitment and
turn it into financing for the project in question.
As more credible purchasing counter-parties enter
the market, and as financial markets get used to the
idea of established payment structures for environmen-
tal performance, it is likely that financial institutions
will begin to get comfortable lending to carbon credit
sellers based upon the value of their emission reduction
purchase agreements just as banks currently finance
power generation facilities based on power purchase
agreements. This will help bridge the divide between
sellers’ desire for upfront capital with buyers’ risk aver-
sion. From the perspective of developing country sell-
ers, there is a strong potential in this path of market
development, as it increases the percentage of hard cur-
rency in domestic project financing. For such a system
to work, it will be essential to educate local financial
institutions on the basics of the CDM and enable this
kind of finance to become operational at the local level.
Forward contract for delivery of CERs at fixed prices
By far the most common structure for CDM transactions
is the forward purchase agreement. In forward con-
tracts, little – if any – cash changes hands on signing of
the contract. The price for delivery of CERs is set at the
time of signing the contract. Accordingly these transac-
tions are also referred to as ‘pay on delivery’ structures.
These forward delivery contracts range from one year
to twenty years, with a substantial number set at either
ten years or through the year 2012, which is the end of
the first commitment period.
The forward contract structure generally requires
the seller to deliver a specific number of CERs, or occa-
sionally a range of CERs, with a minimum and maxi-
mum number per year. The buyer is required to pay a
fixed price for the CERs, usually in US dollars or Euros.
The fixed price will sometimes be structured to increase
over time, based on an inflation index or a pre-agreed
step-up in price.
A complexity in a ten-year contract emerges if a
project uses a seven-year baseline with the baseline re-
analysis for up to two more periods (see chapter 5 and
annex 3 for details on the baselines). If the contract
structure ‘outlives’ the baseline, the seller is clearly at
risk of the seven-year reassessment impacting the
achievable deliverables. Hence, CER sellers are wise to
insert contract clauses to ensure that recalculation of
baselines as required by the terms of the Marrakech
Accords does not penalize them.
Forward contract for delivery of CERs at
floating prices
A key issue in ‘pay on delivery’ contracts is whether
forward prices for delivery are set firmly or are bench-
marked to some outside parameter. A transaction struc-
ture with floating prices requires the seller to deliver a
pre-determined volume of CERs each year, but the price
paid by the buyer is reset each year based on an index.
Given the relative market power of the limited num-
ber of buyers in the market as of 2003, most buyers
71
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
have successfully pressed for fixed price contracts.
However, while a floating price structure appears more
attractive to sellers in a market where participants
assume that carbon prices will increase, it is not with-
out substantial risks to sellers. Specifically, a floating
price makes it much more difficult for the seller to plan
future cash flows, as the total payment to be received
from the buyer will be uncertain every year. This could
impact the potential for bank financing based on the
CER flow. If there is an oversupply of credits in future
markets and prices fall, the seller will receive much
less than they may be currently envisioning, which
could lead to the seller being unable to meet financial
obligations on the project.
Option payment for future delivery of CERs
Buyers occasionally wish to structure a transaction in
which they purchase an option, but not the obligation,
to buy a pre-determined number of CERs at a specific
price from the seller at a specific time in the future. In
this structure, the buyer must pay the seller for the
option today, in return for the right to exercise the
option at the future date specified. The price of an
option to buy is usually a fraction of the actual agreed-
upon price of the CERs.
If buyers exercise their option, then:
The advantage to a buyer of an option structure is that
it provides a great deal of flexibility and allows a hedge
against uncertainty. For example, buyers who think
they will need additional CERs in the future, but who
are uncertain of the amount they will need, can use an
option contract to offset the risk of rising prices for
72
CERs. An option structure provides sellers with an up-
front payment, and may not require delivery of CERs in
the future. However, an option structure can create
additional risk for sellers who are unable to deliver
CERs if and when the buyer exercises the option.
Sellers are usually advised to enter into option struc-
tures only when they expect to have a large number of
CERs to offer, and generally then offer options only on
a small proportion of their total CERs. Also, while the
premium may be a valuable source of immediate capi-
tal, the question remains about the degree to which a
project can be forward-financed based on options, since
there is no certainty that the option will be exercised.
Spot market trades
The spot market is a structure in which a seller delivers
CERs from one year of emissions reductions in return
for a one-time payment from the buyer. In this struc-
ture there is no forward commitment between the sell-
er and buyer for additional delivery of CERs or pay-
ment, although there is nothing precluding the parties
of a spot transaction from executing another spot trans-
action the following year.
The advantage of the spot market to both buyers and
sellers is that it provides both parties with maximum
flexibility for the future. However, the disadvantages
for a seller are the risk of not finding a buyer in subse-
quent years, and the risk that the price declines in the
future. For the buyer there is significant risk that the
price of CERs will increase in subsequent years, the
trend that is predicted by many market analyses.
CONTRACTING ISSUES
Any fair contract should minimize the risk to both par-
ties in the event that either fails to meet the contractu-
al obligations. In this early stage of the CDM market,
the buyers are almost all large, financially stable organ-
izations, while the sellers range significantly in size
and financial strength. Therefore, most contracts are
 CHAPTER 6: CDM TRANSACTIONS: A REVIEW OF OPTIONS
designed primarily to protect the buyer from the risk
that the seller does not perform as per the requirements
of the contract. Another issue that must be negotiated
is what happens in the event that the project activity
produces additional credits. Typically, many buyers,
such as CERUPT, place an option on first right of
refusal. This must be negotiated, however, because the
price may actually be higher, or lower, in the future,
which benefits either the seller or the buyer respective-
ly. Key contractual risks include the following and the
possible solutions are discussed below.
Delivery risk
In a fixed delivery contract, the seller agrees to deliver a
set volume of CERs at a particular time in the future. The
buyer takes on substantial risk if the seller fails to deliv-
er the contracted CERs in time to meet the regulatory
requirement for which they have been purchased. The
buyer risks not finding replacement CERs in time to meet
his requirement, and the risk of finding replacement
CERs at a higher price than had been contracted for.
Given the volatility in the price of CERs, and the
expectation that prices will increase in the future, the
price risk associated with non-delivery is viewed as sig-
nificant for many buyers. The result is that certain buy-
ers have contractually required substantial financial
penalties (often several times the agreed-upon purchase
price from the same year) if sellers are unable to deliver
under the terms of the contract. This provides the seller
with a significant incentive to deliver on time and to
properly hedge against the risk that may be incurred
Sellers have strong financial incentive to take on
delivery risk mitigation responsibilities. This is accom-
plished by:
■ Committing only a percentage of a project’s anticipat-
ed performance to a firm delivery contract;
■ Cross-collateralizing several projects into a pooled pro-
duction portfolio;
■ Purchasing delivery options from other producers –
often combined with business interruption insurance
– to have the financial flexability to exercise the
options in a time of underperformance; and
■ Developing more formal insurance products. Several
financial institutions are developing such instru-
ments either through using cash premiums or
bundling many projects into a pool. However, it is
expected that this will be useful only for industrial
producers of CERs.
On a project-by-project basis, sellers will often reserve
20 per cent or more of the credits from each year’s pro-
duction into a non-delivery ‘buffer’. Buyers will often
insist upon that type of buffering in the contract. In
such cases, buyers will only forward contract for 80 per
cent (or less) of the expected delivery volumes, and pro-
hibit the seller from selling additional CERs until the
buffer is full. This type of contract has a dual purpose: to
help ensure that each year’s commitments are readily
achievable, and to buildup a pool of carbon credits. This
pool can be tapped in case of a project failure to produce
credits for a significant period of time. If project per-
formance is solidly maintained and confidence grows in
the seller’s ability to deliver carbon credits according to
the contract, a seller with a banked credit pool is well
positioned to profit by participating in the carbon mar-
ket. Over the medium or longer term, such position may
result in an advantage if prices of CERs increase from
their current US $2-4/ton price range.
Buyers occasionally seek a ‘right of first refusal’ on
the purchase of buffered credits. CER sellers should
resist such language in the contract, unless the buyer
provides compensation for this option.
Timing risk
Sellers face a risk that the CERs they generate are
sufficient in volume to fulfil the contract requirements,
but that the timing of delivery varies from the dates
specified in the contract. This can put the seller in a
position of contractual non-compliance, triggering
severe financial penalties.
A mechanism that sellers can use to mitigate timing
risk is the use of a multi-year delivery period. In this
contract, the seller is allowed to spread out the delivery
of CERs over a longer time period. For example, rather
than being required to delivery 100,000 tons/year for 10
years, the seller may be required to deliver no less than
300,000 tons in any three-year period, for a cumulative
delivery of one million tons over 10 years.
However, whether a seller can spread out delivery of
CERs is somewhat dependent on the needs of buyers,
who are responding to their domestic policy impera-
73
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
tives. CER delivery can theoretically be more flexible
than delivery of many other commodities, as utilization
is based on reconciling accounts of emissions and reduc-
tions, rather than on the need to physically use an asset
in question at a specific point in time.
Counter-party credit risk
Buyers and sellers cannot enter into long-term contrac-
tual agreements if they believe that the counter-party
carries with it a substantial credit risk. Counter-party
Smaller and less sophisticated sellers will likely
require support to ensure that they engage in
equitable contractual arrangements.
risk has traditionally been considered in terms of assess-
ing sellers. However, given the radical shifts in global
energy commodity markets (and market makers, such as
Enron) over the past years, carbon sellers should also
consider the risks inherent in engaging in long-term
contracts with buyers from developed countries, particu-
larly if the carbon transaction contracts are integral to
project financing.
Counter-party risk for buyers is often significant
because the sellers are located in developing countries.
Credit committees in large corporations often have fairly
rigid counter-party requirements and standards. The fact
that a seller cannot have a higher credit rating than the
country it is based in – and that many CDM countries
have weak credit ratings – often presents an immediate
hurdle to achieving an equitable contract. However, the
74
risk can be mitigated if the contract stipulates annual
delivery of certified credits, which limits the buyer’s
financial exposure at any one period in time.
The traditional manner of addressing this kind of
risk is via third party insurance, such as guarantees
provided by export-import banks and the Multilateral
Investment Guarantee Agency, a member of the World
Bank Group. However, have no experience in assessing
the risks inherent in CER contracts, these institutions
are not yet equipped to handle them. Moreover, the
types of insurance provided by international develop-
ment institutions tend to be fairly narrow – covering
items such as political insurgencies and force majeure
events – rather providing comprehensive guarantees.
Country risk and currency risk
Corporate buyers are often concerned about entering
into a contractual arrangement with a seller in a num-
ber of developing countries due to a perception of signif-
icant country risk, which could come, for example, from
the collapse of an economy or government, conflict or
natural disaster. However, country risk is actually rela-
tively low for buyers because most contracts are ‘pay on
delivery’, so the buyer is not obligated to make any pay-
ment until verification from an independent party that
the CERs have been created by the seller is received.
Additionally, the seller is also required to have host
country approval for the sale of CERs. Finally, partici-
pants in a CER transaction are almost never exposed to
currency risk because the currency flows originate from
developed countries, while the flow of CERs is not affect-
ed by currency rates. Enacting national macroeconomic
policies and an enabling environment that promotes
direct foreign investment keeping in view the national
development priorities can reduce country risk.
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

CHAPTER 7:

The Carbon Offset Marketplace

International trade in the new commodity of carbon offsets has already begun to develop
as countries and companies seek to ‘test the waters’ before the Kyoto Protocol comes into force.
This chapter describes the evolving market for CERs in terms estimated market size, prices
and buyers:

THE MARKET FOR CERS Box 7.1: Bilateral and unilateral models
of CER generation
THE REVELANCE OF NON-KYOTO MARKETS
Box 7.2: Internalizing environmental
THE OBJECTIVES OF BUYERS performance
Table 7.1: Last reported position and
CER TRANSACTION CHARACTERISTICS
possible future position of selected
CURRENT BUYERS Annex I (B) countries with regard
■ The Prototype Carbon Fund to their Kyoto targets
■ New carbon investment funds
■ ERUPT/CERUPT
■ IFC-Netherlands Carbon Facility
■ Asian Development Bank CDM Facility
■ Individual corporate initiatives
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

CHAPTER 7: THE C ARBON OFFSET MARKETPL ACE

International agreements designed to combat climate
change, including the Clean Development Mechanism,
have effectively created a new ‘commodity’ in interna-
tional trade – one that is largely produced in the global
South and consumed by the more industrialized coun-
tries. International trade in this new commodity of car-
bon offsets has already begun to develop as countries
and companies seek to ‘test the waters’ before the Kyoto
Protocol comes into force. This chapter describes the
evolving market for CERs in terms of estimated market
size, prices and buyers.
THE MARKET FOR CERS
In the winter of 2002 the potential carbon credit
demand in all Annex I countries was extensively
researched and each country’s position in the system
of emissions trading was examined. The research con-
cluded that demand for carbon credits exceeded supply
by approximately 249.6 Mt CO2e. The European Union
‘burden sharing’ agreement also places the EU in the
position of a net carbon credit buyer with the approxi-
mate demand of 213.3 Mt CO2e.
The following table presents by country the volume
of existing emissions and proposed targets of the Annex
I (B) countries. The second column indicates whether
the country is a buyer or a seller in the market, which
is determined by its current position with respect to its
Kyoto commitment. If the second column is positive
then the country has to buy CERs to offset their emis-
sions. The second and third columns provide the data
on each countries emission levels, currently, and look-
ing ahead to 2010.
THE REVELANCE OF NON-KYOTO MARKETS
A number of markets for greenhouse gas mitigation
have emerged in parallel to those for CDM CERs, and are
continuing to develop and integrate, while additional
parallel markets will likely appear in the long-term.
How these will impact the growth of the formal CDM
market is unclear. Some recent developments include:
Domestic trading schemes (such as those operating in
the United Kingdom and Denmark and under considera-
tion in Norway) may be widened to include emission
reductions in other jurisdictions. In fact, the European
Union Trading Scheme may enable participants to
meet their targets by purchasing CERs under the CDM
beginning as early as 2005. Greenhouse gas emissions
permits/credits would need to be recognized by both
governments in order to be useful for increasing the
liquidity of CDM credits.
The development of a parallel emissions reduction
market in the United States is a possibility. Since its

BOX 7.1: BILATERAL AND UNILATERAL MODELS OF CER GENERATION

Under the CDM, CERs can be generated in two basic ways:
■ Under the bilateral model, a project developer in a non-Annex I country develops the CDM project in partnership with an
Annex I country. The goal for the Annex I country is to receive the credits realized from the project, either via an emission
reduction purchase agreement or ERPA, or as a result of some other form of financial consideration. Under most ERPAs, cred-
its purchases are committed in advance of issuance but not paid until the CERs are delivered.
■ Under the unilateral model a project is designed, financed and implemented solely by the host country project developer. In
this scenario, the project developer bears all risks and benefits associated with the preparation and sale of CERs. Unilateral
CERs are subject to the same requirements as bilateral CERs.

76
 CHAPTER 7: THE CARBON OFFSET MARKETPLACE

TABLE 7.1: LAST REPORTED POSITION AND POSSIBLE FUTURE POSITION OF SELECTED ANNEX I (B)
COUNTRIES WITH REGARD TO THEIR KYOTO TARGETS

Numbers in parenthesis refer to position of countries with regards to their EU ‘bubble’ target (when applicable)

LATEST REPORTED BAU PROJECTIONS POSSIBLE POSITION

COUNTRY
POSITION (MMtCO 2 e) FOR 2010 (MMtCO 2 e) IN 2010

AUSTRALIA +31 +18 Buyer

AUSTRIA +9 (+13) +9 (+13) Buyer
BELGIUM +19 (+18) +8 (+18) Buyer
BULGARIA -45 -10 Seller
CANADA +117 +103 Buyer
CZECH REPUBLIC -38 -27 to -53 Seller
DENMARK +6.5 (+15) +12 (+21) Buyer
FINLAND +7 (+1) +37 (+31) Buyer
FRANCE +49 (+5) +70 (+26) Buyer
GERMANY -95 (+60) +66 (+222) Buyer
GREECE +24 (-10) +32 to +49 (-2.3) Buyer
HUNGARY -8 -10* Seller*
ITALY +63 (+55) +103 (+96) Buyer
JAPAN +176 +319 Buyer
NETHERLANDS +34 (+30) +53 (+49) Buyer
NEW ZEALAND +2 +15 Buyer/seller (?)
NORWAY +6.7 +16 Buyer
POLAND -130 -3 to -85 Seller
PORTUGAL +16 (-6) +16 (-6.2) Buyer/seller (?)
ROMANIA -80**** +41**** Buyer/seller (?)
RUSSIA -1073 -89 to -122 Seller***
SLOVAK REPUBLIC -17 -5.4 to -13 Seller
SPAIN +82 (+14) +84 (+15) Buyer
SWEDEN +6.4 (-1.9) +9 (+1) Buyer/seller (?)
SWITZERLAND +4.3 +4.2 Buyer/seller (?)
UKRAINE -455 -152 to -68 Seller
UNITED KINGDOM -11 (-25) +5 (-11) Seller
UNITED STATES** +1033 +2154 Buyer

Source: Calculations by EcoSecurities based on emissions levels and business as usual projections for 2010 included in the latest National Communications to the UNFCCC
available until March 2002 (the date of report completion)

Notes: *Hungary’s National Communication projected only CO2 emissions, not aggregate greenhouse gas emissions. Projections are provided only for 2002 – they do not continue until 2012.
**We report the US data for comparative purposes regardless of the US withdrawal from the Kyoto Protocol.
*** EcoSecurities gives the most conservative estimate of Russia’s potential supply of AAUs.
****As of January 2002, Romania’s most recent National Communication to the UNFCCC was dated 1994. Therefore, there is a great uncertainty associated with emissions projections for
Romania.

77
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
withdrawal from the Kyoto Protocol in early 2001, the US
is not a part of the international emissions trading mar-
ket. However, political momentum to develop some type
of cap and trade system, similar to Kyoto, is developing
at the federal level and – more importantly – across
nearly a dozen states, including New York, California,
Massachusetts and Oregon. Since the current US admin-
istration does not recognize Kyoto regulations and stan-
dards, project eligibility criteria would need to be
widened if the US were to join the CDM regime. While
such inclusion would increase the international demand
for carbon credits, its impact on CER prices is uncertain.
The US appears to be highly sensitive to the costs of cli-
mate change mitigation and may not introduce measures
that force would the price of abatement beyond current
permit prices. The table above includes information for
the US because of its significant emissions.
A ‘retail’ market for emission reductions is also
emerging, based on commitments from individuals,
companies and other institutions to activities or opera-
tions that are less greenhouse gas intensive.
Organizations such as the Climate Neutral Network,
Future Forests, Clean Air/Cool Planet and others are
helping facilitate ‘carbon offset’ transactions. While it
is unlikely these will ever be more important than the
‘compliance’ market, they may prove a valuable outlet
for projects that have demonstrably other positive
impacts, such as sustainable human development or
maintaining integrity of the environment.
THE OBJECTIVES OF BUYERS
A number of different buyers are entering the market-
place as well, with diverse objectives, including:
Purchase of low-cost emission reductions as investments.
Most of the buyers are sensitive to the cost of emission
reductions. Current market prices for CERs are quite
low compared to prices forecast under many market
studies. Current buyers may be able to sell at a much
higher price in the future.
Minimization of future risk. This is a primary determi-
nant of buyer behavior. Buyers are concerned about
the potentially large liabilities associated with future
non-compliance.
1 Point Carbon, September 2002.
78
A number of markets for greenhouse gas
mitigation have emerged in parallel to those
for CDM CERs, and are continuing to develop
and integrate, while additional parallel markets
will likely appear in the long-term.
Risk-diversification. A number of buyers are purchasing
different types of credits under all of the trading mech-
anisms in order to spread risk across a portfolio.
Learning-by- doing. Some buyers are keen to undergo
early-stage learning by engaging in comprehensive
project documentation, external verification and certi-
fication of CERs, in order to improve their knowledge of
the market and reduce risks and transaction costs in
the future.
Good publicity. Some buyers are purchasing credits in
order to demonstrate that they are contributing to sus-
tainable development and are concerned about the
future of the global environment.
CER TRANSACTION CHARACTERISTICS: MARKET
SIZE AND PRICES
The current emissions trading market is characterized
by the following transaction types and prices, according
to Natsource (2001) and Point Carbon (2001-2002):
■ As of September 2002, over 125 transactions of green-
house gas emission reductions are known to have
occurred involving approximately 335 MtCO2e1 (more
trades are likely to have gone unreported). Most of
these trades have occurred in Annex I (B) countries.
■ With respect to the CDM, there is price differentiation
based on the perceived risks associated with different
types of credits, with additional considerations given
to the creditworthiness of the seller. Emission reduc-
tions with a perceived high likelihood of acceptance
under the CDM are selling at a premium – between
$32 -$8 per tCO2e. Other verified credits that are consid-
ered less likely to meet either host government accept-
ance or other verification criteria are selling at a dis-
 CHAPTER 7: THE CARBON OFFSET MARKETPLACE

count, in the range of $1.75 to $3.00 per tCO2e. This is ■ Bio-Carbon Fund (World Bank) $100M (target) –
further illustrated in the following section. STATUS (not operational yet)
■ In 2002, the total market size, since 1996, involving ■ The European Bank for Reconstruction €100M
private and publicly funded transactions of carbon and Development
credits reached between $350 million and $500 mil- ■ Canada CDM fund $100M
lion (representing conservative and a liberal estimate, ■ Denmark JI.CDM Fund €100M (approximate
according to Natsource, October 2002). Total project over five years)
volumes for 2002 are estimated at 70 Mt CO2 versus ■ Development Bank of Japan $100M
last year’s volume of 12 Mt CO2. ■ Japan Bank for International

As of late 2003, the market prices ranged between Cooperation $100M

about $3-$10 per tCO2e, with the majority of transac-
tions at the lower range. Predictions about future prices
are helpful in that they provide a rough sketch of mar-
ket activities as they happen. However, price forecasts
in this market include a high degree of uncertainty and
should be treated with caution. Moreover, forecasts
reflect the joint CDM/JI carbon market and not
prices/volumes traded solely under the CDM. CDM proj-
ects are regarded as having higher risk than the Joint
Implementation projects of Eastern Europe.
CURRENT BUYERS
As mentioned earlier, the carbon credit market, which
includes the CDM, is currently characterized by rela-
tively few buyers with a range of objectives. The vast
majority of the publicly known capital for purchasing
emission reductions comes from various funds and mul-
tilateral buyers. As of late 2002, the major institutional
buyers include;
■ The World Bank Prototype
Carbon Fund
EcoSecurities estimates that there is over $1 billion
will be committed via institutional purchasers by the
end of 2003.
The two most influential institutional purchasers
of carbon credits are the Prototype Carbon Fund of
the International Bank for Reconstruction and
Development (World Bank) and the Carboncredits.nl
(also referred to as ERUPT/CERUPT) programmes are
discussed below.
The Prototype Carbon Fund
The Prototype Carbon Fund was established by
the World Bank in 1999 and has been capitalized at
$180 million. Investors include governments and private
sector4. The fund invests in carbon projects that qualify
under JI or the CDM. Its main objectives are:
■ Financing and procurement of high quality emission
reductions that qualify under the UNFCCC:
The fund invests only in projects that produce identifi-
able carbon benefits and contribute to the sustainable
development of host countries.
$180M ■ Knowledge: The fund develops and shares carbon-spe-

■ Carboncredits.nl, the Dutch cific knowledge through experience in the development

ERUPT/CERUPT €250M and financing of carbon projects. It aims to build an
■ The Netherlands Carbon €35M/year for extensive knowledge base that can be shared with other
Development Fund3 up to four years market stakeholders.
■ International Finance Corporation- ■ Build public/private partnerships: The fund aims to
NetherlandsCarbon Facility €40M build partnerships between the public and private
■ The Andean Development Bank €40M sectors to address various risks resulting from climate
■ Community Development $100M (target) – change.
Carbon Fund (World Bank) STATUS $ 35M The fund’s extensive project documentation require-
2
Unless otherwise noted, prices are in US dollars.
3
4
A parallel fund managed by the World Bank of $35M per year for 4 years
The current participants of the Fund include: Government of Canada, Government of Finland, Japan Bank for International Cooperation, Government of the Netherlands, Government
of Norway, Government of Sweden and a range of private companies, which include: British Petroleum (UK), Chubu Electric Power Co. (Japan), Chugoku Electric Power Co. ( Japan),
Deutsche Bank (Germany), Electrabel (Belgium), Fortum (Finland), Gaz de France (France), Kyushu Electric Power Co. (Japan), Mitsubishi Corporation ( Japan), Mitsui & Co. (Japan),
Norsk Hydro (Norway), RaboBank (the Netherlands), RWE (Germany), Shikoku Power Co. (Japan), Statoil (Norway) and Tohoku Electric Power Co. (Japan).

79
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE
ments and screening process mirrors the processes
required under the CDM and JI protocols. This includes
the independent certification and verification of emis-
sion reduction units and extensive public consultation.
The Prototype Carbon Fund assumes risks involving the
creation of the commodity that other buyers do not –
for example, contracts are for ‘validated emission reduc-
tions’ rather than CERs, which means that even if Kyoto
does not come into force, the fund can – and will – still
execute the transaction.
As of the fourth quarter 2003, the Prototype Carbon
Fund had successfully signed eight emissions purchase
agreements. An additional 20 projects are currently
being negotiated. Purchase prices have reportedly
ranged between $3/tCO2e and $4/tCO2e, which is on the
low end of the current price and future projections.
Furthermore, the fund is in the position to commit to
30-40 projects, and it intends to identify and approve
them by mid-2004.
Increasing the geographical diversity of its portfolio
is a key focus of Prototype Carbon Fund policy. For
instance, the share of Latin American CDM projects has
continued to grow. Because this region was active in
early CDM activities, it established an early competitive
advantage. East European and African projects are creat-
ing a better balance. A number of CDM projects are
undergoing the final evaluation, including small hydro
in Guatemala, municipal solid waste in South Africa,
bagasse cogeneration in Thailand, solid waste manage-
ment in India, a wind farm in Honduras, afforestation
in Moldova, and a wind project in Morocco. East Asia
remains an underrepresented region in the current
Prototype Carbon Fund portfolio, and the fund plans
expanding its activities in that region. In addition the
World Bank has created the forestry specific Bio-Carbon
Fund discussed below.
New carbon investment funds
In 2002, the Carbon Finance Unit at the World Bank
announced the development of two new carbon invest-
ment funds – the Bio-Carbon Fund and the Community
Development Carbon Fund – that aim to produce veri-
fied carbon reductions and a range of other sustainable
development and environmental benefits by offering
higher prices to sellers of CERs than the market would
80
otherwise deliver.
The Bio-Carbon Fund aims to develop capacity in host
countries through practical experience and technology
transfer. Although fundraising was still underway in
late 2003, the fund is hoping to receive $100 million
from a variety of governmental and private sector enti-
ties. It aims to demonstrate the potential of carbon
sequestration in forest and agro-ecosystems and land-use
projects to deliver verified emission reductions as well
as a wide range of social and environmental benefits.
The Bio-Carbon Fund will allow participating companies
to diversify their emission reduction strategies, and also
provide an incentive for project developers to innovate
and test projects. It will also support a variety of nation-
al development objectives, such as improving rural
livelihoods, stopping soil erosion and combating deserti-
fication. The BioCarbon Fund is expected to be opera-
tional by early 2004.
The Community Development Carbon Fund will seek
to purchase emission reductions from small projects that
produce a range of sustainable development benefits not
limited to the reduction of greenhouse gas emissions,
particularly if those benefits apply to rural communi-
ties. It aims to encourage small-scale projects in least
developed countries and poorer areas of all developing
countries. The fund was officially launched at the 2002
World Summit on Sustainable Development in
Johannesburg, and declared operational on 11 July 2003
in Washington DC. Initial capitalization is planned to be
$100 million drawn from public and private sources.
Investors will receive CERs The Community
Development Carbon Fund became operational in 2003.
ERUPT/CERUPT
The ERUPT/CERUPT carbon project investment pro-
grammes are managed by Senter International
(www.carboncredits.nl) for the Government of The
Netherlands. Through ERUPT, Senter buys credits from
JI projects – principally in Eastern Europe – on behalf
of the ministries responsible for economic and environ-
mental affairs and buys the CERs from CDM projects
through CERUPT on behalf the Dutch Ministry of
Environment. The Dutch Government funds both.
Both ERUPT and CERUPT programmes are implemented
on a tender basis, during which interested parties are invit-
 CHAPTER 7: THE CARBON OFFSET MARKETPLACE
ed to submit ‘Expressions of Interest’ over stipulated peri-
ods. From these documents, Senter International shortlists
all final project grant co-financing candidates. Short-listed
parties are then invited to submit a detailed project pro-
posal, including a full project design document.
Although they are similar in some respects, func-
tional differences between ERUPT and CERUPT include:
■ ERUPT has a higher minimum for credits contracted.
The minimum scope of credits required for financing
under the ERUPT scheme is set at 500,000 tCO2e in the
commitment period (has been reduced to 250,000
tCO2e in ERUPT-3). CERUPT handles contracts for a
minimum of 100,000 tCO2e for the total crediting peri-
od. Under both schemes interested parties are allowed
to bundle projects in order to achieve the necessary
emission reductions. However, bundled smaller proj-
ects must come with a single (the same) Letter of
Approval from the host-government. That means that
bundled projects must be implemented in the same
country.
■ The proof that a project contributes to the sustainable
development is emphasized more in CERUPT project
assessments.
■ Under ERUPT the Dutch government is willing to pay
upfront for credits up to a maximum of 50 per cent.
Senter International provides a reasonable amount of
the contract value; in which case they are effectively
buying claims on emission reduction units rather
than the ERUs themselves. CERUPT considers advance
payments under exceptional circumstances only if
proven unavoidable and to a maximum of four proj-
ects. It also states that a request for prepayments will
negatively affect the ranking of the project.
Currently ERUPT is preparing the fourth Request
For Proposals to select the next set of emission reduc-
tion projects for the year 2004. However a new tender
for CERUPT is not envisaged in the near future as the
Dutch Ministry of Environment has diversified its
approach by contracting other organizations (World
Bank, International Finance Corporation and CAF) to
buy CDM credits on their behalf.
In case a tender is offered for CERUPT, private entities
willing to sell CERs to the Dutch government will be invit-
ed to follow the familiar CDM project cycle procedure,
As with the Prototype Carbon Fund, CERUPT aims to
invest in high quality carbon projects that will comply
with the CDM. A detailed and comprehensive project
development and assessment process is applied, designed
to meet the requirements of the CDM, including public
consultation. CERUPT projects can be developed inthe
areas of energy efficiency, transportation, energy supply
(including renewables and waste-to-energy), fuel substi-
tution and other types of projects. However, CERUPT will
not invest in forestry-related carbon sequestration proj-
ects (such as afforestration and reforestration), but will
consider all other types of projects, including ‘greenfield’
biomass energy development.
IFC-Netherlands Carbon Facility
Another new fund managed by the International
Finance Corporation of the World Bank Group on behalf
of the Dutch Government is the IFC-Netherlands Carbon
Facility (InCAF). According to the IFC website5, InCAF
is an arrangement under which the IFC will purchase
CERs for the benefit of the Government of The
Netherlands. The Netherlands will use these emission
reductions to help meet its commitments under the
Kyoto Protocol. It has allocated € 44 million (about $ 55
million) for InCAF to be used over the next three years.
InCAF will provide additional revenues to eligible proj-
ects that generate emission reductions in developing
countries.
InCAF will make future payments to the project over
a period of 7-14 years upon annual certification of actu-
al greenhouse gas emission reductions. In return for
these payments, The Netherlands will receive the CERs.
It is possible that InCAF will consider advance pay-
ments under certain conditions. A contract between
InCAF and the project will specify the volume of emis-
sions that are expected to be reduced, the price agreed
per ton of CO2 equivalent, and the crediting period.
InCAF is looking for projects with the following
characteristics:
Location Projects can be located in most developing
countries. Projects in newly industrializing countries
in Central and Eastern Europe are not eligible. A list of
eligible countries is available on request.
Likely project closing Projects must be likely to
reach financial closing within the short term.
81
 THE CLEAN DEVELOPMENT MECHANISM: A USER’S GUIDE

IFC and non-IFC investments InCAF prefers to
work with projects in which IFC is an investor but will
also consider non-IFC financed projects. For non-IFC
projects, the InCAF will look for well-established spon-
sors with access to confirmed sources of conventional
financing. Non-IFC projects will require additional due
diligence on project fundamentals.
Environmental and social impact All projects,
including non-IFC financed projects, must comply with
IFC’s environmental and social policies and guidelines.
Projects that have large-scale adverse environmental or
social impacts will not be considered.
Host country approval The government of the host
country will have to approve the project. IFC can sup-
port the application of the project company to the gov-
ernment for such approval. The host country will also
need to have ratified, or initiated domestic procedures
to ratify, the Kyoto Protocol.
Independent Verifications The initial design of the
project will need to be validated by an Operational
Entity, as required under the Kyoto Protocol. Once a
project is operational, the emission reductions pro-
duced by a project must be verified and certified peri-
odically by auditors.
As of September 2003, there was no information
available as to the number of projects under considera-
tion. However no projects have yet to be approved for
funding.

BOX 7.2: INTERNALIZING ENVIRONMENTAL PERFORMANCE

Some observers fear that simplifying guidelines and procedures will lead to cutting corners in project development and monitor-
ing. They argue that without proper checks and balances, projects that do not meet core CDM criteria could receive approval.
The procedures for due diligence are considered necessary because the whole market for CERs is new, and demands a high level
of environmental integrity in order to be considered success. As time passes, and competitive forces and experience bring
greater efficiency to the process, many believe transaction costs will be reduced while the integrity of the system is maintained.
The higher the transaction costs, the fewer the number of projects that will realize enough benefit to make the process
worthwhile. One way to cope with this issue would be to raise the purchase price of CERs. The World Bank’s two newest funds,
the Bio-Carbon Fund and Community Development Carbon Fund, are exploring this alternative. Rather than purchasing at $3 per
ton like the Prototype Carbon Fund, these new funds will offer $6-8 per ton in order to compensate some of the higher relative
transaction costs.
In this early stage of the market, certain buyers have indicated that they are taking sustainability criteria into account while
determining prices they are willing to pay for CER transfers. For example, under the Netherlands CERUPT Tender projects, there
is a sliding price scale for projects that have different qualitative aspects, with fossil fuel-switching receiving the lowest pricing
and renewable energy projects, such as solar, small hydro and wind power, receiving the highest pricing.
■ Renewable energy (excluding biomass) ¤5.50
■ Energy production by using clean, sustainably grown biomass ¤4.40
(excluding waste)
■ Energy efficiency improvement ¤4.40
■ Others, including fossil fuel switch and methane recovery ¤3.30
Also, in Colombia the Prototype Carbon Fund has developed a series of sustainability criteria, unrelated to carbon emissions
reductions, that will be measured throughout the lifetime of the CDM project. The contract specifically states that the project
will receive higher or lower prices, depending on how well those criteria are ultimately achieved on a year-to-year basis.
Whether price differentiation due to ‘relative sustainability’ will continue or increase as the market evolves, is difficult to pre-
dict. One possibility is that CDM projects that meet high standards may have advantage in tapping other financial mechanisms,
such as loan guarantees.

82
 CHAPTER 7: THE CARBON OFFSET MARKETPLACE
Asian Development Bank CDM Facility
Unlike other development banks, the Asian
Development Bank has not chosen to manage carbon
purchase funds on behalf of an Annex 1(B) countries.
Rather, the bank is establishing an intermediary facili-
ty to operate on behalf of projects in its member coun-
tries. As of late 2003, the facility was still in the plan-
ning phase – however, the following components have
been made publicly available.
The CDM facility will assist the ADB’s developing
member countries in
■ Addressing global climate change issues and sustain-
able development goals by sourcing funds for emis-
sions reductions; and
■ Processing the CDM requirements for identified projects.
It aims to bridge the gap between buyers and sellers,
ensuring a fair return for greenhouse gas abatement
initiatives and assisting developed countries to meet
their commitments
The main objectives of Asian Development Bank’s
CDM facility are to:
■ Promote projects that contribute to poverty reduction
and sustainable development;
■ Support CDM project identification, development,
registration and implementation;
■ Facilitate monitoring and verification of quality
ER credits;
■ Help find competitive prices for ER credits; and
■ Facilitate sourcing of financing for greenhouse abate-
ment projects in developing member countries.
Individual corporate initiatives
A number of large companies have been involved in car-
bon transactions, based mainly on voluntary greenhouse
gas emission reduction targets accepted by individual
business entities. With the approach of 2008 and the sig-
nificant requirements for emission compliance in the
EU, Japan and Canada, the corporate markets for CDM
credits are likely to accelerate rapidly. While many
potential buyers will seek reductions within their own
portfolio of international operations, others will contin-
ue to seek the sustainable development and publicity
aspects incumbent with the CDM.
The best-known voluntary initiative is BP’s (former-
5 www.ifc.org/enviro/EFG/CarbonFinance/carbonfinance
ly British Petroleum) emissions reduction programme,
which has implemented a trading system across all
business units in the company. It emphasizes high qual-
ity credits with strict verification requirements. This
programme constitutes a part of BP’s overall strategic
investment in clean technologies and renewables. Since
most of these programmes are private and operate in
the traditional financial markets, much information
about the transactions – including lessons learned and
prices – are not publicly disclosed. However it can be
assumed that these programmes operate on a very com-
mercial basis and offer lower prices due to the relative
maturity of the market.
In 2001-2002, BC Hydro, a British Columbia (Canada)
electric utility, issued multiple requests for purchases.
The utility was seeking up to 5.5 Mt of emission offsets
to meet a voluntary commitment to compensate 50 per
cent of the increased greenhouse emissions from two
new gas-fired generation plants. Another Canadian
entity, Ontario Power Generation Ltd., has also pur-
chased greenhouse gas emissions permits in order to
satisfy its voluntary emission reduction targets.
TransAlta, a large Canadian coal fired utility, has
announced its intention to become ‘net carbon neutral’
by 2020, an initiative which, given the company’s core
assets in coal-fired generation, would signify the need
to purchase millions of tons of emissions reductions
each year.
Japanese companies have been participants in a
number of projects, particularly in economies in transi-
tion that will pursue CDM activities and East-Asian
economies. Examples of such transactions, both in cred-
it trade and CDM investments, include:
■ Tokyo Electric Power invested in LULUCF projects in
Australia, funding plantations managed by State
Forests of New South Wales;
■ Tohoku Electric bought Australia's Powercoal Pty Ltd.
emission credits bundled with coal (estimated emis-
sions reduction 1.6 MtCO2e/year);
■ Toyota Tsusho purchase of 400,000 tons from the
V&M fuel switch Project in Brazil in 2003; and
■ J-Power’s purchase of one million tons from a
portfolio of projects in Latin America in 2003.
83
84
 ANNEXES

The basic text of this manual provides an overview of the Clean Development Mechanism
process and factors that will further its successful implementation. The following five annexes
provide more detailed, supplementary materials, including a template of the project design
document; a summary of the World Wildlife Fund’s ‘Gold Standard’ code of best practices;
details on some of the more technical issues raised in the text; a compendium
of resources; and a glossary of relevant terms:

Annex I: CDM Project Design Document . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-2

Annex II: The Gold Standard: Quality Standards . . . . . . . . . . . . . . . . . . . . . . . . . .A-11

for CDM and Joint Implementation Projects
Annex III: Additional Notes on Baseline Analysis, Leakage and Monitoring . . . .A-16

Annex IV: Resources for Further Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-22

Annex V: Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-27

 ANNEX I
Clean Development Mechanism
Project Design Document (CDM-PDD)
Version 01 1

CONTENTS

A. General description of project activity

B. Baseline methodology
C. Duration of the project activity / Crediting period
D. Monitoring methodology and plan
E. Calculations of GHG emissions by sources
F. Environmental impacts
G. Stakeholders comments

ANNEXES

Annex 1.1: Information on participants in the project activity

Annex 1.2: Information regarding public funding
Annex 1.3: New baseline methodology
Annex 1.4: New monitoring methodology
Annex 1.5: Table: Baseline data

INTRODUCTORY NOTE
1. This document contains the clean development mechanism project design template (CDM-PDD).
It elaborates on the outline of information in Appendix B ‘Project Design Document’ to the Modalities
and Procedures (decision 17/CP.7 contained in document FCCC/CP/2001/13/Add.2).
2. The CDM-PDD can be obtained electronically through the UNFCCC CDM web site
(http://cdm.unfccc.int/Reference/Documents), by e-mail (cdm-info@unfccc.int) or in printed from
the UNFCCC secretariat (Fax: +49-228-8151999).
3. Explanations for project participants are in italicized font.
4. The Executive Board may revise the project design document (CDM-PDD), if necessary. Revisions shall
not affect CDM project activities validated at and prior to the date at which a revised version of the
CDM-PDD enters into effect. Versions of the CDM-PDD shall be consecutively numbered and dated.
5. In accordance with the CDM M&P, the working language of the Board is English. The CDM-PDD shall
therefore be submitted to the Executive Board filled in English. The CDM-PDD format will be available
on the UNFCCC CDM web site in all six official languages of the United Nations.
6. The Executive Board recommends to the COP (COP/MOP) to determine, in the context of its decision
on modalities and procedures for the inclusion of afforestation and reforestation activities in the
CDM (see also paragraph 8-11 of decision 17/CP.7), whether the CDM-PDD shall be applicable to this
type of activities or whether modifications are required.
7. A glossary of terms may be found on the UNFCCC CDM web site or from the UNFCCC secretariat by
e-mail (cdm-info@unfccc.int) or in print (Fax: +49-228-815 1999).
A-2
1
Adapted from the UNFCCC website (http://cdm.unfccc.int/Reference/Documents).
A. GENERAL DESCRIPTION OF PROJECT
ACTIVITY
A.1 Title of the project activity:
A.2.Description of the project activity:
(Please include in the description
- the purpose of the project activity
- the view of the project participants of the contribution of the proj-
ect activity to sustainable development (max. one page).)
A.3. Project participants:
(Please list Party(ies) and private and/or public entities
involved in the project activity and provide contact informa-
tion in Annex 1.) (Please indicate at least one of the above
as the contact for the CDM project activity.)
A.4. Technical description of the project activity:
A.4.1. Location of the project activity:
A.4.1.1 Host country Party(ies):
A.4.1.2 Region/State/Province etc.:
A.4.1.3 City/Town/Community etc:
A.4.1.4 Detail on physical location,
including information allowing the unique
identification of this project activity
(max one page):
A.4.2. Category(ies) of project activity
(Using the list of categories of project activities and of
registered CDM project activities by category available
on the UNFCCC CDM web site, please specify the catego-
ry(ies) of project activities into which this project
activity falls. If no suitable category(ies) of project
activities can be identified, please suggest a new catego-
ry(ies) descriptor and its definition, being guided by
relevant information on the UNFCCC CDM web site.)
A.4.3. Technology to be employed by
the project activity:
(This section should include a description on how
environmentally safe and sound technology and know-
how to be used is transferred to the host Party, if any.)
A.4.4. Brief explanation of how the
anthropogenic emissions of anthro-
pogenic greenhouse gas (GHGs) by
sources are to be reduced by the pro-
posed CDM project activity, including
why the emission reductions would not
occur in the absence of the proposed
project activity, taking into account
national and/or sectoral policies and
circumstances:
(Please explain briefly how anthropogenic greenhouse
gas (GHG) emission reductions are to be achieved
(detail to be provided in section B.) and provide the
total estimate of anticipated reductions in tonnes of
CO2 equivalent as determined in section E. below.)
A.4.5. Public funding of the project
activity: (In case public funding from Parties
included in Annex I is involved, please provide in
Annex 2 information on sources of public funding
for the project activity, including an affirmation
that such funding does not result in a diversion
of official development assistance and is separate
from and is not counted towards the financial
obligations of those Parties.)
A-3
 B. BASELINE METHODOLOGY
B.1.Title and reference of the methodology
applied to the project activity:
(Please refer to the UNFCCC CDM web site for the title and
reference list as well as the details of approved methodolo-
gies. If a new baseline methodology is proposed, please fill
out Annex 3. Please note that the table “Baseline data”
contained in Annex 5 is to be prepared parallel to complet-
ing the remainder of this section.)
B.2. Justification of the choice of the methodology
and why it is applicable to the project activity
B.3. Description of how the methodology is applied
in the context of the project activity:
B.4. Description of how the anthropogenic
emissions of GHG by sources are reduced below
those that would have occurred in the absence
of the registered CDM project activity
(i.e. explanation of how and why this project is additional
and therefore not the baseline scenario)
B.5. Description of how the definition of the proj-
ect boundary related to the baseline methodology
is applied to the project activity:
B.6. Details of baseline development
B.6.1 Date of completing the final draft of
this baseline section (DD/MM/YYYY):
B.6.2 Name of person/entity determining the
baseline:
(Please provide contact information and indicate
if the person/entity is also a project participant listed
in Annex 1.)
A-4
C. DURATION OF THE PROJECT ACTIVITY /
CREDITING PERIOD
C.1 Duration of the project activity:
C.1.1. Starting date of the project activity: (For
a definition by the Executive Board of the term “start-
ing date”, please refer to UNFCCC CDM web site. Any
such guidance shall be incorporated in subsequent ver-
sions of the CDM-PDD. Pending guidance, please indi-
cate how the” starting date” has been defined and
applied in the context of this project activity.)
C.1.2. Expected operational lifetime of the
project activity: (in years and months, e.g. two years
and four months would be shown as: 2y-4m)
C.2 . Choice of the crediting period and relat-
ed information: (Please underline the appropriate
option (C.2.1 or C.2.2.) and fill accordingly)
(Note that the crediting period may only start after the date
of registration of the proposed activity as a CDM project
activity. In exceptional cases, the starting date of the credit-
ing period can be prior to the date of registration of the proj-
ect activity as provided for in paras. 12 and 13 of decision
17/CP.7 and through any guidance by the Executive Board,
available on the UNFCCC CDM web site)
C.2.1. Renewable crediting period
(at most seven (7) years per period)
C.2.1.1. Starting date of the first
crediting period (DD/MM/YYYY):
C.2.1.2. Length of the first crediting period (in
years and months, e.g. two years and four months
would be shown as: 2y-4m):
C.2.2. Fixed crediting period
(at most ten (10) years):
C.2.2.1. Starting date (DD/MM/YYYY):
C.2.2.2. Length (max 10 years): (in years
and months, e.g. two years and four months
would be shown as: 2y-4m)
D. MONITORING METHODOLOGY AND PLAN
(The monitoring plan needs to provide detailed information related to the collection and archiving of all relevant data
needed to
• estimate or measure emissions occurring within the project boundary;
• determine the baseline; and;
• identify increased emissions outside the project boundary.
The monitoring plan should reflect good monitoring practice appropriate to the type of project activity.
Project participants shall implement the registered monitoring plan and provide data, in accordance with the plan, through
their monitoring report.
Operational entities will verify that the monitoring methodology and plan have been implemented correctly and check
the information in accordance with the provisions on verification. This section shall provide a detailed description of the
monitoring plan, including an identification of the data and its quality with regard to accuracy, comparability, completeness
and validity, taking into consideration any guidance contained in the methodology.
Please note that data monitored and required for verification and issuance are to be kept for two years after the end of
the crediting period or the last issuance of CERs for this project activity, whatever occurs later.)

D.1. Name and reference of approved methodology applied to the project activity:
(Please refer to the UNFCCC CDM web site for the name and reference as well as details of approved methodologies. If a new
methodology is proposed, please fill out Annex 4.) (If a national or international monitoring standard has to be applied to
monitor certain aspects of the project activity, please identify this standard and provide a reference to the source where a
detailed description of the standard can be found.)

D.2. Justification of the choice of the methodology and why it is applicable to the project activity:

D.3. Data to be collected in order to monitor emissions from the project activity, and how this data
will be archived: (Please add rows to the table below, as needed)

ID number Data Data Data Measured (m), Recording Proportion How is the For how Comment
(Please use type variable unit calculated (c) or frequency of data data long is
numbers to estimated (e) to be archived? archived
ease cross- monitored (electron- data to
referencing ic/paper) be kept?
to table D.6)

D.4. 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 if and how data will
be collected and archived on these emission sources. (Please add rows to the table below, as needed)

ID number Data Data Data Measured (m), Recording Proportion How is the For how Comment
(Please use type variable unit calculated (c) or frequency of data data long is
numbers to estimated (e) to be archived? archived
ease cross- monitored (electron- data to
referencing ic/paper) be kept?
to table D.6)

A-5
 D.5. Relevant data necessary for determining the baseline of anthropogenic emissions by sources of
GHG within the project boundary and identification if and how such data will be collected and
archived. (Depending on the methodology used to determine the baseline this table may need to be filled. Please add rows
to the table below, as needed.)

ID number Data Data Data Will data be How is the data For how long is data Comment
(Please use type variable unit collected on archived? archived to be kept?
numbers to this item? (If (electronic/paper)
ease cross- no, explain).
referencing
to table D.6)

D.6. Quality control (QC) and quality assurance (QA) procedures are being undertaken for data moni-
tored. (data items in tables contained in section D.3., D.4. and D.5 above, as applicable)

Data Uncertainty level Are QA/QC procedures Outline explanation why QA/QC
(Indicate table and of data planned for these data? procedures are or are not being
ID number e.g. D.4-1; (High/Medium/Low) planned.
D.4-2)

D.7 Name of person/entity determining the monitoring methodology: (Please provide contact information
and indicate if the person/entity is also a project participant listed in Annex 1 of this document.)

E. CALCULATION OF GHG EMISSIONS BY
SOURCES
E.1. Description of formulae used to estimate
anthropogenic emissions by sources of greenhouse
gases of the project activity within the project
boundary: (for each gas, source, formulae/ algorithm,
emissions in units of CO2 equivalent)
E.3. The sum of E.1 and E.2 representing the project
activity emissions:
E.4. Description of formulae used to estimate the
anthropogenic emissions by sources of greenhouse
gases of the baseline: (for each gas, source,
formulae/algorithm, emissions in units of CO2 equivalent)

E.2. Description of formulae used to estimate leak- E.5. Differencebetween E.4 and E.3 representing
age, defined as: the net change of anthropogenic the emission reductions of the project activity:
emissions by sources of greenhouse gases which
occurs outside the project boundary, and that is E.6. Tableproviding values obtained when applying
measurable and attributable to the project activity: formulae above:
(for each gas, source, formulae/ algorithm, emissions in
units of CO2 equivalent)

A-6
F. ENVIRONMENTAL IMPACTS G. STAKEHOLDERS COMMENTS
F.1. Documentation on the analysis of the environ- G.1. Brief description of the process on how
mental impacts, including transboundary impacts comments by local stakeholders have been invited
(Please attach the documentation to the CDM-PDD.) and compiled:

F.2. If impacts are considered significant by the G.2. Summary of the comments received:
project participants or the host Party:
please provide conclusions and all references to support doc- G.3. Report
on how due account was taken of
umentation of an environmental impact assessment that any comments received:
has been undertaken in accordance with the procedures as
required by the host Party.

ANNEX 1.1
CONTACT INFORMATION ON PARTICIPANTS IN THE PROJECT ACTIVITY
(Please copy and paste table as needed)

Organization:
Street/P.O.Box:
Building:
City:
State/Region:
Postfix/ZIP:
Country:
Telephone:
FAX:
E-Mail:
URL:
Represented by:
Title:
Salutation:
Last Name:
Middle Name:
First Name:
Department:
Mobile:
Direct FAX:
Direct tel:
Personal E-Mail:

A-7
 ANNEX 1.2
INFORMATION REGARDING PUBLIC FUNDING
ANNEX 1.3
NEW BASELINE METHODOLOGY
(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. A baseline shall cover emis-
sions from all gases, sectors and source categories listed in
Annex A of the Kyoto Protocol within the project boundary.
The general characteristics of a baseline are contained in
para. 45 of the CDM M&P.
For guidance on aspects to be covered in the description of
a new methodology, please refer to the UNFCCC CDM web site.
Please note that the table “Baseline data” contained in
Annex 5 is to be prepared parallel to completing the remain-
der of this section.)
1. Title of the proposed methodology:
2. Description of the methodology:
2.1. General approach (Please check the
appropriate option(s))
• Existing actual or historical
emissions, as applicable;
• Emissions from a technology that represents
an economically attractive course of action,
taking into account barriers to investment;
• The average emissions of similar project activ-
ities undertaken in the previous five years, in
similar social, economic, environmental and
technological circumstances, and whose per-
formance is among the top 20 per cent of their
category.
2.2. Overall description (other characteristics
of the approach):
3. Key parameters/assumptions (including
emission factors and activity levels), and
data sources considered and used:
4. Definition of the project boundary related
to the baseline methodology:
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(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 attributa-
ble to the project activity. Please describe and justify which
gases and sources included in Annex A of the Kyoto Protocol
are included in the boundary and outside the boundary.)
5. Assessment of uncertainties:
(Please indicate uncertainty factors and how those uncer-
tainties are to be addressed)
6. Description of how the baseline method-
ology addresses the calculation of baseline
emissions and the determination of project
additionality:
(Formulae and algorithms used in section E)
7. Description of how the baseline method-
ology addresses any potential leakage of the
project activity:
(Please note: Leakage is defined as the net change of anthro-
pogenic emissions by sources of greenhouse gases which
occurs outside the project boundary and which is measurable
and attributable to the CDM project activity.) (Formulae and
algorithms used in section E.5)
8. Criteria used in developing the proposed
baseline methodology, including an explana-
tion of how the baseline methodology was
developed in a transparent and conservative
manner:
9. Assessment of strengths and weaknesses
of the baseline methodology:
10. Other considerations, such as a descrip-
tion of how national and/or
sectoral policies and circumstances
have been taken into account:
ANNEX 1.4
NEW MONITORING METHODOLOGY
Proposed new monitoring methodology (Please provide a detailed description of the monitoring plan, including
the identification of data and its quality with regard to accuracy, comparability, completeness and validity)

1. Brief description of new methodology

(Please outline the main points and give a reference to a detailed description of the monitoring methodology).

2. Data to be collected or used in order to monitor emissions from the project activity, and
how this data will be archived
(Please add rows to the table below, as needed)

ID number Data Data Data Measured (m), Recording Proportion How is the For how Comment
(Please use type variable unit calculated (c) or frequency of data data long is
numbers to estimated (e) to be archived? archived
ease cross- monitored (electronic/ data to
referencing paper) be kept?
to table D.6)

3. 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 if and how data will
be collected and archived on these emission sources. (Please add rows to the table below, as needed)

ID number Data Data Data Measured (m), Recording Proportion How is the For how Comment
(Please use type variable unit calculated (c) or frequency of data data long is
numbers to estimated (e) to be archived? archived
ease cross- monitored (electronic/ data to
referencing paper) be kept?
to table D.6)

4. Assumptions used in elaborating the new methodology: (Please list information used in the calculation of
emissions which is not measured or calculated, e.g. use of any default emission factors)

5. Please indicate whether quality control (QC) and quality assurance (QA) procedures are being
undertaken for the items monitored. (see tables in sections 2 and 3 above)

Data Uncertainty level Are QA/QC procedures Outline explanation why QA/QC
(Indicate table and of data planned for these data? procedures are or are not being
ID number e.g. D.4-1; (High/Medium/Low) planned.
D.4-2)

A-9
 6. What are the potential strengths and weaknesses of this methodology? (please
outline how the accuracy and completeness of the new methodology compares to that of approved methodologies).

7. Has the methodology been applied successfully elsewhere and, if so, in which
circumstances?
After completing above, please continue filling sub-sections D.2. and following.

ANNEX 1.5
TABLE: BASELINE DATA
(Please provide a table containing the key elements used to determine the baseline (variables, parameters, data sources etc.).
For approved methodologies you may find a draft table on the UNFCCC CDM web site. For new methodologies, no predefined
table structure is provided.)

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ANNEX II
The Gold Standard: Quality Standards
for CDM and Joint Implementation
Projects 1
SUMMARY
The rules for the Clean Development Mechanism –
which allows credits from projects starting after
January 1, 2000 – were finalized in the 2001
Marrakech Accords. CDM operating procedures are
still being developed by the CDM Executive Board.
In the meantime several projects have been pro-
posed as potential CDM activities. Many more are
expected over the coming months.
A number of these projects have certain short-
comings, especially in terms of a marked failure to
demonstrate ‘additionality’ and deliver added envi-
ronmental and social benefits. At present a number
of environmental groups do not see that the rules
and guidelines being developed by the CDM Executive
Board will adequately deal with these issues.
The ‘Gold Standard’ described below represents
the first independent best practice benchmark for
the CDM and Joint Implementation (JI) greenhouse
gas offset projects. It offers project developers a
tool to ensure that the CDM and JI deliver credible
projects with real environmental benefits and, in
so doing, give confidence to host countries and the
public that projects represent additional invest-
ments in sustainable energy services.
The Gold Standard has been developed by the
World Wildlife Fund (WWF) using the seminal
work done by HELIO International for COP5 and
subsequently refined by the SouthSouthNorth
Project. This work has been done in consultation
with a range of environmental, business and gov-
ernmental organizations.
With appropriate design and implementation,
CDM and JI projects can play a valuable role in pro-
1
Adapted from the webpage on WWF Gold Standard:
http://www.panda.org/about_wwf/what_we_do/climate_change/what_we_do/business_industry/gold_standard.cfm
moting the spread of sustainable energy technolo-
gies. The Gold Standard provides such guidance on
project development and implementation. It is
composed of a package of quality control criteria,
specifically:
■ Project eligibility is restricted to renewable ener-
gy and demand side energy efficiency projects
because these technologies carry inherently low
environmental risks;
■ An explicit ‘additionality’ test is used to screen
out projects that would have happened without
the CDM;
■ A methodology deploying environmental and
social indicators is used to check the contribution
of a project to sustainable development.
This document contains an overview of the
rationale, structure and content of the Gold
Standard. An independent Standards Advisory
Board will be responsible for finalizing the stan-
dards and will continue to refine them over time.
The publication of the draft Gold Standard marks
the start of a final round of consultation and it is
hoped that a wide range of interested parties will
provide inputs.
At the end of the consultation period the Gold
Standard Advisory Board will review and evaluate
the comments received and, after any necessary
modifications have been made, a final version of
the standard will be published.
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 CURRENT PROBLEMS WITH THE ENVIRONMENTAL INTEGRIT Y OF CDM
Unfortunately, despite pressure from the environmental community and other sectors, the CDM
rules and the project design document still offer little guarantee of environmental integrity.
The main weaknesses of CDM procedures in that regard include:
■ A lack of guidance on the precise interpretation of additionality. Two interpretations are possi-

ble: that emissions be lower than in the ‘no-project’ scenario, and that the project would not
have occurred without the CDM.
The first is a baseline issue whereas the second screens out ‘business as-usual’ projects; both are
necessary to ensure effectiveness of emissions reduction projects.
Unfortunately, the second component is not dealt with in the current rules; and currently there
is no indication from the CDM Executive Board or in the project design document that project
developers will be obliged to show that their projects would not have happened without the CDM.
■ A lack of reference to the requirement that baselines be developed in a ‘conservative manner’ in

the project design document. This is a key provision in the Marrakech Accords and one of the few
guarantees against baseline inflation. However, the Executive Board has so far offered no guidance
how this requirement should be applied.
■ There is similarly no reference to long-term benefits of climate change mitigation, despite this

being a core part of the CDM text in the Kyoto Protocol.

■ The provisions for stakeholder consultation and public participation are judged inadequate by a

number of environmental interests. Although the project design documents must be posted on
the Internet, there is no requirement to ensure that potentially affected stakeholders will have a
guaranteed access to these PDDs, especially in the case of rural projects. Likewise, there is no
requirement that documents be made available in a language familiar to stakeholders, nor that
alternative methods be used when Internet access is not practical. Furthermore, there is no
opportunity for further comment on project developers’ and operational entities’ replies, nor a
direct link to the decision on project registration or approval by host country’s designated
national authorities. In other words, stakeholders may not be able to trace the project implemen-
tation process. In sum, there is little convincing evidence that a project would be stopped even if
there were significant local opposition.
■ The inclusion of a wide range of unsustainable project types – including fossil fuel technologies,

large hydro and potentially large-scale monoculture plantation forestry – crowds out smaller
investments in sustainable renewable energy
and end-use energy efficiency. This argument is confirmed by evidence from many of the projects
currently under development to be registered under the CDM. Similarly, baseline methodologies
are inconsistent and tend to inflate the number of credits projects will receive.
■ Finally, the contribution to sustainable development – including a transition away from ‘carbon-

dirty’ technologies and an emphasis on positive social and environmental impacts – is often
treated as an optional extra rather than a central project feature.
As mentioned above, these problems stem in part from the weaknesses in the existing rules. At
the same time, while it is possible that these flaws will be rectified by the CDM Executive Board in
the near-future, the extreme pressure from investors to keep carbon prices a t their lowest is forc-
ing the project developers to cut corners.

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IMPACTS OF ‘LOW-QUALIT Y’ CDM: THE
RATIONALE FOR A GOLD STANDARD
Problems highlighted in the adjacent box mean
that, in its current form, the CDM is unlikely to
deliver on much of the promised assistance to the
developing economies. Due to the current lack of
environmental safeguards, there is a significant
risk that the CDM projects will:
■ Generate few net emission reductions, increasing
global emissions at a time when the need for deep
emissions cuts is becoming increasingly evident;
■ Result in the prevalence of non-additional
projects maintaining low carbon prices;
■ Cause environmental and social damages to host
country communities;
■ Strengthen existing dependence on unsustainable
energy sources and technologies while doing little
to enhance the market for innovative technologies
and other long-term climate solutions, despite the
declarations in favor of renewable energy and
energy efficiency made by many political and
business leaders on numerous occasions.
Such developments would, in turn, threaten to
damage the credibility of the CDM and undermine
its potential to deliver the expected benefits. Four
significant consequences of this are:
■ Uncertainty for investors, with many rules still
unknown and a lack of basic standards;
■ Heightened political risks affecting projects and
associated reputation risks affecting investors,
particularly those who have invested in corpo-
rate social responsibility;
■ Little confidence for host countries in support-
ing the projects since there will not be sufficient
belief that such projects help them move to a
sustainable energy future or represent new and
additional investments; and
■ Public doubts over the credibility of emission
reduction projects in developing economies.
The Gold Standard has been developed with
the explicit aim of addressing these problems and
providing a means for focusing on its original
objectives. The overall result will be the delivery of
appropriate sustainable energy services. The Gold
Standard attempts to ensure that CDM is not mis-
used, providing confidence to the public, investors
and governments.
DEVELOPMENT OF THE GOLD
STANDARD
The Gold Standard has been developed to a stage
where it is ready for a final round of inputs from
stakeholders after a series of consultations with
environmental groups, governments and the pri-
vate sector, including investors, project developers,
and verifiers.
This development has been governed by a set of
basic principles:
■ Standards have to be supported by a wide range
of stakeholders who believe in the overriding
importance of maintaining environmental
integrity;
■ A balance between environmental rigor with
practicality – as applied to project developers
and operational entities;
■ Avoidance of elevating transaction costs or
complicating bureaucratic procedures;
■ Direct compatibility with the CDM and JI project
cycles;
■ Maintaining simple procedures, easily handled
by standard CDM project operators, including
developers, verifiers and local NGOs;
■ Ensuring the creation of a global standard, readily
applicable in a variety of local and national con-
texts and across different sectors.
To ensure adherence to the above principles, the
WWF and other stakeholders undertook a wide
range of consultative meetings, workshops and
established an independent Standards Advisory
Board comprised of NGO members, academics and
renewable energy project developers from around
the world, all with wide experience and knowledge
of the CDM and sustainable energy. With the assis-
tance of WWF staff and its various consultants, the
Standards Advisory Board has synthesized the com-
ments, reviewed, evaluated and improved the Gold
Standard’s constituent screens to the point where
the standard is now ready for final consultation.
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 OVERVIEW OF THE GOLD STANDARD
The Gold Standard sets out a code of best practice
on many issues in the PDD and incorporates a small
number of extra screening mechanisms necessary
to deliver real contributions to sustainable develop-
ment in host countries plus long-term benefits to
the climate.
The main components of the Gold Standard are
as follows:
■ A project type screen based on a list of
technologies comprising renewable energy,
demand-side energy efficiency, and some transi-
tion technologies;
■ An additionality and baselines screen focused
on ensuring that:
a) proposed projects would not occur in the
absence of the CDM; and
b) that projects will have lower emissions than
would occur than in the absence of the CDM.
■ Sustainable development standards that will
ensure projects are evaluatedagainst specific
environmental, social and economic/technologi-
cal criteria and deliver a net positive result for
sustainable development.
Project type screen
The aim of the Gold Standard is to help catalyze
the market for paradigm shifting sustainable ener-
gy projects. As a result, the Standard is restricted
to the project types listed below:
Renewable energy:
■ Photovoltaics
■ Solar thermal
■ Ecologically sound biomass:
● Energy crops (Forest Stewardship Council or
FSC1 certified)
● Forestry (Forest Stewardship Council
certified)
● Agro-processing residues (e.g. sugar cane bagasse,
mustard crop residues, rice, coffee husks)
■ Wind
■ Geothermal
■ Small, low impact hydro
■ Ecologically sound biogas
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End use energy efficiency in the
following sectors:
■ Industrial
■ Public
■ Commercial
■ Residential
■ Agricultural
■ Transport
Additionality and baseline issues
The Gold Standard seeks to ascertain the answer to
two fundamental questions:
1. Would the project have occurred in the absence
of the CDM?
2. Are emissions reduced below the level that would
have occurred in the absence of the project?
The Standard also seeks to ensure that
valuable ODA is not spent on subsidizing the
acquisition of CERs.
Projects, therefore, have to demonstrate that:
1. No similar projects in terms of technology, fuel,
size, site and process have been commercially
implemented, without carbon finance, in the
region in the previous 5 years;
2. The project cannot have been publicly
announced prior to its development asa CDM
project, unless formally cancelled, with a clear
explanation why;
3. Barriers to finance or broader implementation –
such as institutional blockages and lack of project
finance – are being removed;
4. The baseline represents the most conservative
applicable; and
5. ODA is not used to purchase CERs.
Sustainable Development
The sustainable development aspect of the CDM is
heavily promoted by the Gold
Standard using the following techniques:
1. Insistence on best practice environmental
impact assessment, triggered by local stakeholders,
rather than project developers and host
governments;
2. Explicit public participation procedures;
3. A ‘Sustainability Matrix’ that breaks the subject
down into a series of environmental, social and
economic/technological categories and simply
assesses the project’s performance on each. Projects
have to show net positive benefit in each of these
categories in order to meet the Gold Standard.
NEXT STEPS AND DEVELOPMENT OF AN
INDEPENDENT L ABELLING SCHEME
The public release of the final draft of the Gold
Standard during UNFCCC COP8 in New Delhi in
October 2002 marked the launch of a consultation
process with a twofold aim:
■ To obtain inputs for the standards to ensure that
they maintain the highest levels of environmen-
tal integrity while remaining a practical tool for
project developers;
■ To continue the process of building support for
the concept and content of the Gold Standard.
Running parallel to the technical consultation
process, WWF will be looking to further explain
the concept of the Gold Standard to environmental
groups, governments and businesses and continue
discussions on the development of an independent
project labeling scheme. While WWF will seek to
consult with all groups and regions, particular
emphasis will be placed on engaging with those
who have not been extensively participating in
consultations up to date, particularly in Africa and
Latin America as well as several business sectors.
WWF intends the Gold Standard to form the cen-
terpiece of an independent labeling scheme for CDM
and JI projects, which will give explicit recognition
to high quality projects and increase certainty for
investors. The release of the Gold Standard is the
first concrete public step in this process.
In the meantime, the Gold Standard is designed
to be a stand-alone tool that can exist with or with-
out the existence of the labeling scheme. The even-
tual launch of the labeling scheme - tentatively
called the ‘Carbon Label’ – is dependent on achiev-
ing widespread support and securing funding to
finance its operations until it can cover its own
costs. WWF has raised the concept of the Carbon
Label in a number of workshops and informal dis-
cussions, and up to date it has received positive
response, with support for the scheme already been
expressed by a number of actors, including NGOs
and private sector firms in both the industrialized
and developing world and several Annex I(B)
governments.
One of the most challenging aspects related to
the quantification of emission reductions generat-
ed by greenhouse gas mitigation projects is the
determination of their baselines. The following sec-
tions provide some additional details on that
process, and how to monitor it.
Establishing the baseline scenario requires
knowledge regarding conventional practices in the
affected area, the local economic/sociological situa-
tion, wider (national, regional or even global) eco-
nomic trends, which may be affecting the conven-
tional economic outputs of a project, and relevant
policy parameters. The analysis must consider his-
torical data, but also plausible future variables.
Monitoring guidelines are highly dependent on the
technical characteristics of different projects.
While the existing rules set by the official text
and the Marrakech accords establish a series of
requirements and constraints to the process of base-
line setting and monitoring procedures, there is lim-
ited guidance available to project developers and val-
idators. In other cases, the requirements are either
ambiguous, enabling different interpretations, or
inadequate with relation to the desired outcome of
ensuring the environmental integrity of the Clean
Development Mechanism. The following sections,
however, may clarify some technical points regard-
ing baseline analysis – including measuring of proj-
ect activity – leakage and monitoring.
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 ANNEX III
Additional notes on baseline analysis,
leakage and monitoring
One of the most challenging aspects related to the
quantification of emission reductions generated by
greenhouse gas mitigation projects is the determi-
nation of their baselines. The following sections
provide some additional details on that process,
and how to monitor it.
Establishing the baseline scenario requires
knowledge regarding conventional practices in the
affected area, the local socio-economic situation,
wider (national, regional or even global) economic
trends, which may be affecting the conventional
economic outputs of a project, and relevant policy
parameters. The analysis must consider historical
data, but also plausible future variables.
Monitoring guidelines are highly dependent on the
technical characteristics of different projects.
While the existing rules set by the official text
and the Marrakech accords establish a series of
requirements and constraints to the process of base-
line setting and monitoring procedures, there is lim-
ited guidance available to project developers and val-
idators. In other cases, the requirements are either
ambiguous, enabling different interpretations, or
inadequate with relation to the desired outcome of
ensuring the environmental integrity of the Clean
Development Mechanism. The following sections,
however, may clarify some technical points regard-
ing baseline analysis – including measuring of proj-
ect activity – leakage and monitoring.
1
This annex has been excerpted from a paper entitled “Baseline analysis for non-forestry and non-land-use projects,” prepared by EcoSecurities Ltd. and SGS for DEFRA
(the UK Department for Environment, Food and Rural Affairs), 2002.
A-16
1
ADDITIONALIT Y TESTS
Even before initiating the process of determination
of a project baseline, it is necessary to demonstrate
that the purported greenhouse gas benefits of the
project will be truly additionall.. Several addition-
ality tests have been devised to assess the eligibility
of projects
■ Technological tests – where activities have result-
ed from the introduction of new technologies or
through the removal of technological barriers.
Evidence would include comparison of current
practices and technologies with those to be adopt-
ed by the project.
■ Institutional or programme tests -- where activi-
ties go beyond the scope of the programs of the
institutions involved in the development of the
project. Evidence would include the removal of
institutional constraints, or the implementation
of measures in excess of current activities and
regulatory requirements.
■ Financial tests – although in many cases negative
cost projects can still be truly additional, demon-
stration that a project incurred higher costs (or
has higher risks) compared with those of compa-
rable baseline activities provides clear indication
of its additionality.
Projects may demonstrate additionality using
one or more (but not necessarily all) of the above
tests. Additionality criteria are difficult to evaluate
objectively on a project-by-project basis. As with
other screening programs, two types of errors exist:
the approval of non-additional projects, and the
exclusion of valid ones. The concept itself is com-
plicated because it requires assessment of hypothet-
ical future scenarios in the absence of the project.
PROJECT-SPECIFIC VERSUS GENERIC
BASELINES
In many cases, it can be argued that a detailed
project specific study is likely to yield a more accu-
rate prediction of emissions than a broader, region-
al or sectoral assessment. The attraction of this
approach is that analysis is focused on the specific
areas and activities relating to the project, and
developers may have a better knowledge of local
conditions. However, it may also be argued that
giving project developers the task of developing
baselines introduces the risk that they may choose
scenarios that maximize their perceived benefits.
Moreover, if baselines are developed by different
teams not consulting each other, it may be difficult
to ensure consistency between assessments result-
ant from application of different baselines.
Allowing ad-hoc project baselines may lead to
inconsistent approaches among similar projects
and increase the risk that project baselines would
be set strategically to maximize the potential to
generate credits.
MEASURING PROJECT ACTIVIT Y
Different types of project will have their level of
activity measured in either volumes of output or of
input. Certain types of projects are more easily
assessed by measuring the amount of project out-
put rather than project input. This is the case of
electricity generation, where it is easier to assess
how much electricity is generated by a range of
generating sources than to assess the amount of
fuels used by each of these generating sources.
Using technological parameters related to the gen-
eration efficiency of the various technologies used,
it is possible to estimate the amounts of fuels used.
In some cases, however, there is no clear out-
put, or it is difficult to quantify or estimate it, and
it is necessary to work with amount of emissions
generated by the activity itself. This is the case of:
■ Fugitive gas collection projects – apart from the
component related to the possible utilisation of
gases (whose emission reductions need to be
quantified in that context), the main impact of
these projects relates to the effect of collecting
and transforming a gas with more potent green-
house gas effect into a gas with less potent one.
In this case, there is not an easily defined unit of
output, and the level of activity is measured in
terms of volumes of gas collected.
■ Transportation projects based on use of cleaner
fuels – because of the difficulties in determina-
tion of parameters such as distance travelled,
tonnages transported, occupancy and quality of
the vehicle fleet, it is often very difficult to
quantify the level of activity these projects in
terms of their output (transportation units).
Whenever possible, it is preferable to determine
the amount of cleaner fuels used and assume that
an equivalent amount of fuels with a higher car-
bon content were not used as a consequence of
the project.
In any case, the level of project input or output
is a parameter easily defined, since it can be esti-
mated by the project developer at the beginning of
the project and monitored throughout the project
lifetime.
C ARBON EMISSION FACTORS
Carbon emission factors are a measurement of the
carbon intensity of a fuel or activity, expressed as
the amount of CO2 equivalents that are emitted per
unit of project activity. Depending on the type of
project activity, the determination of a carbon
emission factor or CEF is done in a different way
For projects measured as units of output, their
CEF is a function of the type of fuel used, the
amount of fuel used for the production of the
expected amount of output, the carbon content of
the fuel, and the conversion efficiency of the tech-
nology used. This is the case of electricity projects.
CEFs for projects measured in terms of units of
input could be determined in different ways:
■ The carbon content of the fuel used, in terms of
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 tC per ton of fuel, converted into CO2 equivalents If the project is expected to be reducing the
emitted; emissions of multiple gases, these analysis have to
■ The carbon content of the fuel used, in terms of be done repeated times, for each of the gases.
tC per terajoules of energy generated, and then After calculating the emissions reductions to be
converted into CO2 equivalents emitted; generated by the project, it may be necessary to
■ The global warming potential of a gas, in units of adjust the results for uncertainties, and to deduct
CO2 equivalent. This is the case of all fugitive gas any possible leakage that may be occurring as a
collection projects. consequence of the project.
However, the main challenge in the baseline
determination process is to identify the alterna- LEAKAGE
tive providers of the services or products that The term ‘leakage’ is commonly used to refer to an
would operate in the absence of the project unanticipated loss of net carbon benefits of a proj-
(i.e., in the baseline scenario), so that their carbon ect as a consequence of the implementation of proj-
emissions factor can be used for the calculation of ect activities. For this reason, leakage is also
emissions in the baseline. referred to as a greenhouse gas externality. Because
leakage usually occurs outside of the project’s
C ALCUL ATING BASELINE EMISSIONS immediate boundaries, it is also referred to as an
AND EMISSION REDUCTIONS – ‘off-site effect’.
BASIC APPROACH While leakage often refers to the negative
Calculation of emissions of the baseline scenario is externalities of a project -- i.e. those that result in
done according to the following equation: additional greenhouse gas emissions -- it is possible
that a project also produces positive greenhouse gas
Level of project CO2 emissions externalities. This has been referred to as ‘positive
Baseline activity (in units of factor (CEF)
= x leakage’ or ‘spillover’. Because of its negative
emissions input or output of the alternative
of the project) to the project impact on the environment, the former requires a
(baseline scenario) great deal more attention than the latter.
Leakage effects can be divided into two cate-
The emissions of the project should also be calculat- gories, as follows.
ed, according to the same equation, but using the Primary leakage, also referred to as ‘slippage’,
CEF of the project activity: occurs when the GHG benefits of a project are
entirely or partially negated by increased GHG
Level of project CO2 emissions emissions from similar processes in another area.
Project activity (in units of factor (CEF)
= x Primary leakage essentially results in the displace-
emissions input or output of the project’s
of the project) technology, fuel or gas ment of the negative activity tackled by the project
(the ‘baseline driver’), rather than its avoidance.
The amount of emission reductions that the project It is, therefore, directly related to the activities or
will generate are calculated as follows: threats that are modelled in the baseline. Primary
leakage can be divided into the following sub-types:
Emission = Baseline emissions x Project emissions activity shifting, meaning that the activities,
reductions (t CO2) (t CO2)
which cause emissions are not permanently avoid-
ed, but simply displaced to another area and out-
sourcing, the purchase or contracting out of the
services or commodities that were previously pro-
duced or provided on-site.
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Secondary leakage occurs when a project’s outputs
create incentives to increase greenhouse gas emis-
sions elsewhere. The most common cause of this
is related to market effects, which occur when emis-
sions reductions are countered by emissions creat-
ed by shifts in supply and demand of the products
and services affected by the project. For example,
a new power plant may lead to an increase in the
supply, and hence a reduction in prices, which may
lead to an increase in electricity usage in relation
to the baseline projection. This type of leakage is
most likely to be associated with projects that
affect market-based activities in a competitive
market scenario, such as grid-connected electricity.
It is less likely to occur in projects whose baselines
are not related to competitive markets, such as, for
instance, fuel switching retrofit projects.
Another source of unexpected carbon emissions
occurs in the event of incomplete or inaccurate
project or baseline determinations (e.g., emissions
from transportation). This should be seen more as
a fault of the project-baseline calculations rather
than an issue of leakage.
It has been proposed that leakage needs to be
incorporated into the carbon acccounting of the
project, and that the leakage estimated for a proj-
ect should simply be deducted from the project’s
claims. An alternatve approach has been proposed,
whereby ‘leakage coefficients’ are defined based on
the perceived risk of leakage of a project, and is
used to reduce the project’s claims accordingly.
While these are valid ideas, the main problem
remains how to identify and quantify leakage, so
that it can be deducted or converted into coeffi-
cients to adjust a project’s claims.
Identification and quantification of leakage
remains one of the most challeging technical issues
related to the development of greenhouse gas miti-
gation projects. This has been the subject of many
studies, and it appears to be equally problematic
2
for both land use and energy projects ). The main
2
See, for instance, Chomitz, K., 1998, Baselines for Greenhouse Gas Reductions: Problems, precedents, solutions. Development Research Group. World Bank and Schlamadinger, B.
and G. Marland, 2000m Land Use and Global Climate Change – Forests, Land Management and the Kyoto Protocol, Pew Center on Global Climate Change
challenge of the analysis is to identify whether it is
indeed occurring. Even if analysis of the project
were extended beyond the immediate project
boundaries, it is often impossible to detect whether
shifts in behaviour, supply and demand of electrici-
ty, for instance, have occurred as a consequence of
the project or as independent effects.
Experience to date has been limited to a few
projects, and hindered by the lack of data, and
short timeframes since project inception.
Qualitative methods may need to be further
developed, together with efforts to generate more
accurate data .
Perhaps the most effective way of dealing with
leakage is to try to prevent it through appropriate
project design. This could be effective in the case of
sources of primary leakage, where well-structured
project designs may be sufficient to prevent leak-
age from occurring, and avoiding the need for more
complicated quantification analyses. With relation
to market effects, econometric methods may prove
useful, but is likely that they their application will
remain limited due to the lack of data and the com-
plexity of the analyses required. A more pragmatic
approach may be to determine threshold values
below which market effects can be considered
negligible.
MONITORING
Article 12 of the Kyoto Protocol states that CDM
emission reductions must be real, long-term and
measurable. Measurable relates to the demonstra-
tion that emissions have been avoided and this is
proved through the development and implementa-
tion of a monitoring plan that provides objective
(for example, documentary) evidence that emis-
sions have been avoided. The monitoring plan must
also demonstrate the emission reductions in a
transparent, complete, consistent, comparable and
accurate manner.
A-19
 Monitoring may be better understood by placing it
within the context of a project cycle. Once the proj-
ect has been implemented, the project developers
may undertake activities that can be described as
monitoring, evaluation, reporting and verification.
This description also helps to separate the activities
of monitoring and verification, which are often
linked although they are discrete activities carried
out by different entities.
Monitoring involves continuous or periodic
measurement of specific parameters. Evaluation
involves the calculation of greenhouse gas emis-
sions using a defined protocol. Reporting is the
documentation of this process, explaining how the
information was collected, what quality control
procedures were applied and how greenhouse gas
emissions were calculated. The project participant
carries out all these steps. Verification is carried
out by an independent entity that checks the data
collection procedures and calculations and if possi-
A-20
ble, corroborates the findings with information
from an alternative source.
Depending on the type of project technology
and the monitoring methodology applied, a signifi-
cant proportion of the information required under
the monitoring rules may be additional to monitor-
ing data that would be gathered if the project were
not part of the CDM. This may be particularly true
in locations where there are fewer reporting
requirements in place. The verification of the emis-
sion reductions will also place a financial burden
on the project developer. Since the intensity of the
verification process is determined by the risks asso-
ciated with the monitoring and evaluation proce-
dures, a good monitoring plan will result in easier
and cheaper verification of emissions. A poor moni-
toring plan may result in higher costs, fewer emis-
sions or, in the worst case, an inability to adequate-
ly demonstrate that emissions have been avoided.
A-21
 ANNEX IV: Information Sources

Where can I get more information? 1 National Communications. It also aims to promote
There is a wealth of information available on the the quality, comprehensiveness, and timeliness
CDM. Finding the right information is not always of initial National Communications.
easy. A cross-section of websites and information
sources is provided below, with a particular IPCC Special Report on Land Use, Land Use
preference for those that contain good links to Change and Forestry (LULUCF)
other sources. This list is by no means exhaustive, http://www.ipcc.ch/.
and its inclusion does not necessarily imply All IPCC Special Reports can be downloaded as
endorsement by the authors. well as other publications and information on
the work of the IPCC.
Where do I find out about official
meetings and texts? Where would I find out more about
United Nations Framework Convention the climate policy process?
on Climate Change (UNFCCC) International Institute for Sustainable
http://www.unfccc.de/ Development (IISD), Canada
The UNFCCC keeps a complete list of documents http://iisd1.iisd.ca/climatechange.htm
relating to the convention on its website including Publish an electronic newsletter on all important
the Kyoto Protocol as well as access to Country international meetings on climate change
Reports. It includes all reports on COPs. Access the (including COPs)
documentation by clicking the “Resources” button.
Pew Centre for Climate Change
UNFCCC – CDM site http://www.pewclimate.org/
http://unfccc.int/cdm/ Publishes articles on climate change related issues
For information on the CDM, meetings of the aimed at US corporations and public.
Executive Board and the project activity cycle.
Earth Negotiations Bulletin (ENB)
National Communications Support Programme http://www.iisd.ca/linkages/climate/
http://www.undp.org/gef/cc/ Provides daily coverage on the COP meetings,
The National Communications Support Programme including an analysis of the negotiations and
works with more than 130 participating countries reports of side events.
in eight subregions: Africa, Arab States, Europe
and the CIS, Asia, the Pacific, the Caribbean, and Climate Policy
Central and South America. It was launched by http://www.climatepolicy.com
the UNDP and the UNEP, in co-operation with A research journal looking at national and
the Secretariat of the UNFCCC. The Programme international policy response to climate change,
provides technical support to enhance the capacity including forestry and the CDM.
of non-Annex I parties to prepare their initial

1 Adapted from Laying the Foundations for Clean Development: Preparing the Land Use Sector, A quick guide to the Clean Development Mechanism, Louise Aukland and
Pedro Moura Costa, from EcoSecurities; Stephen Bass, Saleemul Huq, and Natasha Landell-Mills, from IIED; Richard Tipper and Rebecca Carr, from The Edinburgh
Centre for Carbon Management. http://www.cdmcapacity.org/manual.html
A-22
Centre for Clean Air Policy (CCAP)
http://www.ccap.org/
Provides up to date news, papers and discussions
on domestic and international climate change poli-
cies, including the role of land use in the CDM.
Resources for the Future (RFF)
http://www.rff.org/
Draws on an extensive ‘think tank’ of expert
researchers, focusing primarily on the economic
and social sciences in natural resource issues. The
site has an extensive on-line library with separate
sections on forestry, land use and climate.
How can I find out about the
science and research surrounding
the CDM?
IPCC Data Distribution Centre (DDC)
http://ipcc-ddc.cru.uea.ac.uk/
Established to facilitate the timely distribution of
a consistent set of up-to-date scenarios of changes
in climate and related environmental and socio-
economic factors for use in climate impacts assess-
ments. The intention is that these new assessments
can feed into the review process of the IPCC, in
particular to the Third Assessment Report (TAR).
IPCC National Greenhouse Gas Inventories
Programme
http://www.ipcc-nggip.iges.or.jp/
Pacific Institute for Studies in Development
http://www.pacinst.org/
An independent, non-profit centre created in 1987
to conduct research and policy analysis in environ-
ment, sustainable development, and international
security, with a focus on long-term solutions that
require an interdisciplinary perspective.
Bangladesh Centre for Advanced Studies (BCAS),
Bangladesh
http://www.bcas.net
Has a number of publications mainly on vulnerabil-
ity and impacts of climate change in Bangladesh
Center for International Forestry Research
(CIFOR)
http://www.cifor.cgiar.org/
Covers the sustainable management and use
of forests in developing countries, particularly
the tropics. This includes work on forest carbon,
sustainable livelihoods and biodiversity.
The FAO Climate change and forestry
mailing list
http://www.fao.org/forestry/climate
Regular e-mail updates on all issues relating to cli-
mate change and forestry, including publications,
policy news, projects, and interesting websites.
International Institute for Environment
and Development (IIED)
http://www.iied.org/
An independent, non-profit organization promot-
ing sustainable patterns of world development
through collaborative research, policy studies, net-
working and knowledge dissemination. The site
includes information on sustainable development
criteria and strategies, forestry, land use and
climate change, with a large list of publications
that can be downloaded.
Forest Trends
http://www.forest-trends.org/
An organisation that aims to promote market based
approaches to forest conservation. Their website
has some good links to other information sources
on forestry issues, including a section on forest
carbon under ‘forest services’.
Climate Ark (climate change and renewable energy
portal) http://www.climateark.org/
An internet portal dedicated to promoting public
policy that addresses global climate change through
reductions in carbon dioxide and other emissions,
renewable energy, energy conservation and ending
deforestation. Climate Ark provides a useful search
engine on climate change-related issues, and links
to current and past news.
A-23
 Where can I find out more about pilot
carbon projects?
Activities Implemented Jointly (AIJ)
http://unfccc.int/program/aij/aijproj.html
The UNFCCC’s official list of AIJ projects accepted
by the designated national authorities.
ICRAF (International Centre for Research
in Agroforestry)
http://www.icraf.cgiar.org
ICRAF, based in Nairobi, Kenya, maintains
information on agroforestry activities including
some pilot CDM projects.
Face Foundation
http://www.facefoundation.nl/
FACE (Forests Absorbing Carbon dioxide Emissions)
is a non-profit organisation that has been funding
the planting and maintenance of forests since 1990.
Ilha do Bananal
http://www.ecologica.org.br
A pilot carbon offset and conservation project
in Brazil.
SouthSouthNorth
http://www.southsouthnorth.org/
The mission of the SouthSouthNorth Project, or
SSN Project, is to design, develop and implement
Clean Development Mechanism projects under
the Kyoto Protocol
Plan Vivo
http://www.planvivo.org/
The site holds an online manual for the Plan Vivo
Systems for planning, managing and monitoring
the supply of carbon services from small farmers,
particularly in developing countries, in ways that
enhance rural livelihoods.
The Nature Conservancy (TNC)
http://nature.org/aboutus/projects/climate/
TNC is a conservation organisation in the USA,
with partner organisations in Asia-Pacific, Canada,
A-24
the Caribbean and Latin America, working to pre-
serve plants animals and natural communities,
mainly through land purchases. It is involved in
climate change projects in several counties includ-
ing Rio Bravo in Belize and Noel Kempff in Bolivia.
The Center for Environmental Leadership
in Business, at Conservation International
http://www.celb.org
Builds partnerships between the private sector and
the environmental community, including projects
to offset emissions through forest conservation and
reforestation.
The World Land Trust
http://www.worldlandtrust.org
The World Land Trust is a conservation charity that
purchases land in developing countries to conserve
biodiversity and threatened ecosystems. It is devel-
oping policy advice for the DFID on CDM projects.
Tanzania International Small Group and Tree-
planting Program (TIST) http://www.tist.org
Formed in 1999, this is a community-driven pro-
gramme to sequester carbon and create carbon storage
in a way that is consistent with the best practices of
sustainable development. It is developing within the
context of CDM principles.
World Resources Institute (WRI)
http://www.wri.org
Information on a range of issues of importance
to the CDM and land use sectors, including some
pilot CDM projects. Plenty of papers and publica-
tions are available.
United States Initiative on Joint
Implementation (USIJI)
http://www.gcrio.org/usiji/
USIJI is a pilot programme encouraging projects that
mitigate greenhouse gas emissions and promote sus-
tainable development. The site provides useful infor-
mation on project development, ongoing projects,
links and related documents on climate change.
Moving Towards Emissions Neutral Development
(MEND)
http://www.cdmcapacity.com/MEND
A DFID funded project to investigate how CDM proj-
ects can be implemented to optimise sustainable
development targets. The focus countries were
Ghana, Bangladesh, Columbia and Sri Lanka.
Carbon Monitor
A newsletter published by Environmental Inter-
mediaries & Trading Group Limited. It covers many
issues on commercialising the carbon offsets created
by Kyoto and provides regular updates with commen-
tary. You can sign up for the newsletter free by
emailing Richard Hayes. rhayes@nznet.gen.nz
Where can I go for institutional
support?
U.S. Country Studies Program
http://www.gcrio.org/CSP/webpage.html
Through the U.S. Country Studies Program, the
U.S. Government has been providing technical and
financial support to 56 developing countries and
countries with economies in transition to assist
them in conducting climate change studies. The
studies have enabled these countries to develop
inventories of their anthropogenic emissions of
greenhouse gases, assess their vulnerabilities to
climate change, and evaluate response strategies
for mitigating and adapting to climate change. The
program was announced by the President prior to
the United Nations Conference on Environment and
Development (UNCED), also known as the Earth
Summit, in Rio de Janeiro, Brazil, in 1992.
The Global Environment Facility (GEF)
www.gefweb.org
The GEF is funded by the World Bank and works in
conjunction with national governments, NGOs and
scientific organisations to provide grants for projects
on biodiversity, climate change, international waters
and ozone. Projects funded include carbon sink pro-
tection, enhancement and restoration projects that
improve carbon storage in biomass and soils.
United Nations Development Program (UNDP)
www.undp.org/seed/eap/html/climate.htm
UNDP is committed to supporting developing coun-
tries in responding to climate change concerns as
part of their overall sustainable development
efforts. UNDP works with developing countries to
created integrated solutions to social, economic
and environmental problems, with a primary focus
on improving the lives of those living in extreme
poverty. UNDP is actively engaged in learning-by-
doing projects in both climate change mitigation
and adaptation efforts. Projects include the
engagement of the private sector in CDM in Brazil
and South Africa, field testing of the manual and
pilot CDM projects in the Latin America region, and
a water governance and climate change adaptation
pilot project. This website will be periodically
updated in the future to reflect ongoing and
future activities.
The Joint Implementation Network (JIN),
the Netherlands http://www.northsea.nl/jiq
was created in 1994 to establish an international
network for research and information exchange
about JI, including CDM mechanisms and projects.
It publishes the Joint Implementation Quarterly
which reviews current developments and project
progress.
How can I find out more about selling
credits or getting financial assistance?
The Prototype Carbon Fund (PCF)
http://www.prototypecarbonfund.org/
The World Bank’s PCF aims to demonstrate how
project-based emissions transactions can mitigate
climate change. The site contains news items, dis-
cussion arenas, and key documents on projects that
have applied to the PCF, including baseline studies,
monitoring and verification protocols and purchase
agreements.
CERUPT
http://www.senter.nl/asp/page.asp?id=i001236
&alias=erupt
A-25
 Funded by the Dutch government, the CERUPT pro-
gramme purchases carbon credits from CDM projects.
The programme is run by Senter, the agency respon-
sible for the execution of grant schemes on behalf of
a range of Dutch ministries. To date, CERUPT has not
accepted credits from land use CDM projects.
Future Forests
http://www.futureforests.com
A UK company offering voluntary carbon offsets
to companies and individuals. It purchases carbon
credits from forestry projects in the UK and in
developing countries.
PrimaKlima
http://www.primaklima-weltweit.de
A German organization which finances and imple-
ments afforestation, forest management and forest
conservation projects in cooperation with national-
ly and internationally recognised organizations in
order to mitigate global climate change. It is also
carrying out research on behalf of the EC on
guidelines for JI/CDM projects.
EcoSecurities Ltd - http://www.ecosecurities.com
/100services/130financial_services.html
An environmental finance services advisory firm
that provides technical, policy and financial advice
on climate change issues, with specialisations in
land use and the CDM.
Where can I go for help and advice?
Environment and Development Action in the
Third World (ENDA) http://www.enda.sn/
Although primarily with a focus on energy,
ENDA has an active climate change group and
provides an insight into the opportunities for
the CDM, especially in Africa.
Tata Energy Research Institute (TERI),
India http://www.teriin.org
Has a large number of items on climate change
issues, including CDM in India. Also publishes a
regular newsletter.
A-26
The Edinburgh Centre for Carbon Management
(ECCM) http://www.eccm.uk.com
ECCM provides policy and technical advice to
government and industry in the areas of forestry
and land use. ECCM also develops carbon sequestra-
tion projects in developing countries.
EcoSecurities Ltd
http://www.ecosecurities.com
The website has more than 50 publications covering
a range of issues specific to the CDM and land use
sector including leakage, permanence, baselines,
monitoring and crediting.
Winrock International
http://www.winrock.org/
Employs a group of experts in quantification and
monitoring of carbon in large projects, as well as
technical support services for agriculture, forestry
and natural resources management.
Oak Ridge National Laboratory (ORNL) Carbon
Dioxide Information Analysis Center (CDIAC)
http://cdiac.esd.ornl.gov
The primary global-change data and information
analysis centre of the US Department of Energy
(DOE). It has large data holdings relevant to many
areas of climate change.
Trexler and Associates, Inc. (TAA)
www.climateservices.com
Trexler provides climate change risk management
services to large companies and develops mitigation
projects including forestry offset projects.
Société Generale de Surveillance (SGS)
http://www.sgs.nl/agro/pages/carbonoffset.asp
SGS already has experience with the certification
of a number of land use projects and executive
summaries are available on the website.
 ANNEX V: Glossary

TERM DEFINITION

Activities A pilot programme established in 1992, which allowed private entities in one country
Implemented to reduce, sequester, or avoid emissions through a project in a different country.
Jointly (AIJ) During the AIJ Pilot Phase, projects were conducted with the objective of establishing
protocols and experiences, but without allowing carbon credits to be transferred
between developed and developing countries.

Additionality According to the Articles on Joint Implementation and the Clean Development
Mechanism of the Kyoto Protocol, emissions reduction units will be awarded to
project-based activities only upon receiving the proof that the projects achieve
reductions that are “additional to those that otherwise would occur” without
project implementation.

Annex I Party A country listed in Annex I of the UNFCCC. The parties have various responsibilities
under the UNFCCC, including a non-binding commitment to reduce greenhouse gas
emissions by the year 2000. Legally binding emissions targets for Annex 1 Parties
amount to an aggregate reduction of at least 5 per cent from 1990 levels by 2008-2012.

Annex B Party These are the emissions-capped industrialized countries and economies in
transition (Eastern Europe and the former Soviet Union) listed in Annex B of
the Kyoto Protocol.

Baseline According to Marrakech Accords (2001), it is the scenario that reasonably

represents anthropogenic emissions by sources of greenhouse gases that would
occur in the absence of proposed project activity.

Baseline Methodology A greenhouse gas emissions forecasting matrix (or a system of equations)
permitting project developers to obtain an estimation of anthropogenic emissions
under the business-as-usual scenario.

Carbon Sequestration The capture and storage of CO2 and other greenhouse gases in a manner preventing its
re-entry into the atmosphere for a specified period of time, where the carbon storage
area is commonly called a ‘carbon sink’. Carbon sequestration projects commonly
include activities in forestry, soil conservation and underground injection of CO2.

Certification The process of verifying achieved greenhouse gas emissions reductions in different
phases of CDM or JI project implementation. Certification is completed by an independ-
ently accredited authority. It is required to create a formal title on emissions reduction
units generated in the course of project implementation: once certification is complet-
ed, the emission reduction becomes a separate tradable commodity.

A-27
 TERM DEFINITION

Certified Emissions The formal commodity transferred to project-developing entities in Annex I

Reductions (CER) or/and Annex B states for the amount of emissions reductions achieved in the
process of CDM project implementation, provided they meet certain eligibility
criteria. CERs generated under the CDM will be recognized only after emissions
reductions are proven additional (see the definition of additionality above), the
project specifics meet all the requirements of the host-country, and the CDM
adaptation levy has been paid.

Clean Development Article 12 of the Kyoto Protocol allows Annex 1 Parties to implement projects that
Mechanism (CDM) reduce emissions in non-Annex 1 Parties in return for certified emissions reduc-
tions (CERs) and to assist the host Parties in achieving sustainable development
and contributing to the ultimate objective of the UNFCCC.

Change in climate that is attributed directly or indirectly to human activity that

Climate Change alters the composition of the global atmosphere and that is in addition to natural
variability observed over comparable time periods. (IPCC)

Climate Variability Climate variablility refers to variation in the mean state and other statistics
(such as standard deviations, the occurrence of extremes, etc.) of the climate
on all temporal and spatial scales beyond that of individual weather events.
Variability may be due to natural internal processes within the climate system
(internal variability) or to variations in natural or anthropolygenic external
forcing (external variability). (IPCC)

Cogeneration Utilization of waste heat from electricity generation – such as exhaust from gas tur-
bines – for industrial purposes or district heating or further electrical generation.

Commitment Period The five-year Kyoto Protocol Commitment Period running from the calendar year
2008 to calendar year 2012 inclusive. During this period all Annex B jurisdictions
have to meet their greenhouse gas emissions reduction obligations for 2008-2020 as
defined by the Kyoto Protocol.

Conference of Parties The Conference of Parties (COP) to the UNFCCC consists of more than 170 nations
(COP) that ratified or acceded to the Framework Convention on Climate Change. The
COP is charged with promoting, developing and reviewing the implementation
of the convention.

Counter-party The risk of loss from an unfulfilled obligation of payment for emissions reduction
Credit Risk credits delivery, or the risk of non-delivery of emissions reduction credits.

Crediting Period The temporal framework within which newly generated greenhouse gas emissions
reduction credits can be recognized by the COP and acquired by a project financing
A-28
TERM DEFINITION

party under JI and/or CDM. Within the Kyoto Protocol, Annex B governments can-
not receive credits before the first commitment period (2008-12) towards their
emission obligation, except under the CDM. In the CDM the crediting has been
permitted since 2000.

Crediting Lifetime A period over which a specific CDM project can earn emissions reduction credits.
Under the Marrakech Accords, crediting lifetime can be either 10 years, or 21 years
the latter through seven-year renewal periods.

Demand-side Utility programs, or energy-consumer programs designed to control energy

Management consumption on the customers’ side. Such programs may include (among others)
energy conservation, a variety of increased energy efficiency measures, load
management, and load building.

Designated National A body appointed by a CDM host-country to oversee CDM implementation within
Authority this jurisdiction

Designated According to the UNFCCC, the DOE is either a domestic legal entity or an international
Operational organization accredited and designated, on a provisional basis until confirmed by the
Entity (DOE) COP/MOP, by the CDM Executive Board (EB). Every DOE has two functions:
1. To validate and subsequently request registration of a proposed CDM
project activity; and
2. To verify emission reduction of a registered CDM project, to certify it
as appropriate and to requests the CDM Board to issue CERs.

Emissions Cap A ceiling on emissions allowed for each particular country (or a legal entity within
a given jurisdictions) within a designated time frame. The term frequently refers
to national emissions allowances.

Emissions Inventory A database or an archive of historical emissions within a given jurisdiction

Emissions Reduction Under the Kyoto Protocol, a specified amount of greenhouse gas emissions reduc-
Unit (ERU) tions (usually one ton, as measured in carbon dioxide equivalents) achieved
through a Joint Implementation project.

Emissions Reduction A contract guiding the transfer of emissions reduction credits (CERs or ERUs) from
Purchase Agreement one party to another in CDM or JI regimes.
(ERPA)

Environmental Impact The assessment of the environmental impacts likely to arise from a specific action
Assessment (i.e. legislation, a policy, a program or a JI/CDM project)

A-29
 TERM DEFINITION

Emissions Trading Article 17 of the Kyoto Protocol. It provides Annex 1 Parties to trade emissions
allowances with other Annex 1 Parties.

(Financial) Equity A financial term denoting an ownership interest in a company or project asset.
First Commitments
Period 2008-2012, as defined by the Kyoto Protocol (see the definition of ‘Commitment Period’)

Forward Contract A market transaction in which a seller agrees to deliver a specific commodity to a buyer
at some point in the future. Forward contracts are privately negotiated and are not
standardized. Further, the two parties must bear each other’s credit risks. This form of
a contract usually allows a buyer to initially avoid almost all capital outflow

Futures Contract An agreement to have the option to buy or sell a specific amount of a commodity
or financial instrument at a certain time in the future for a particular (specified)
price. The price is agreed upon between the buyer and seller on a commodity
exchange via a standardized contract defined by the exchange. Futures contracts
typically have a range of delivery dates and are marked to market daily. At this
stage, a greenhouse gas emissions futures market does not exist and most carbon
transactions represent forward contracts.

Global Environment An international organization established in 1991, which helps developing

Facility (GEF) countries and economies in transition to fund environmental projects/programs.
GEF grants support activities in biodiversity, climate change, international waters,
land degradation, the ozone layer, and persistant organic pollutants.

Global Warming Global warming potential is an index defined as the cumulative radiative forcing
Potential (GWP) between the present and some chosen time horizon caused by a unit mass of gas
emitted now, expressed relative to a reference gas such as carbon dioxide. Hence,
CO2 been designated a GWP of 1, methane (CH4) has a GWP of 23, etc.

Greenhouse Gases The six gases regulated under the Kyoto Protocol as the main contributors
to the greenhouse effect. The main and naturally-occurring gases are:
1. Carbon dioxide (CO2); 2. Methane (CH4); and 3. Nitrous Oxide (N2O).
In addition to the three gases listed above, there are additional chemically
engineered greenhouse gases, which occur on a very limited basis in nature:
1. Hydroflurocarbons (HFCs); 2. Perfluorocarbons (PGCs); and 3. Sulphur
Hexofluoride (SF6).

Host Country The country where a given emissions reduction project is located

Reductions of greenhouse gas emissions that occurred due to economic collapse or

Hot Air declined production in the economies of transition(principally Russia and
Ukraine) for reasons not directly related to emissions reduction efforts.
A-30
TERM DEFINITION

Independent Entity An independent entity is a body, which validates the baseline setting approach
and calculations for a JI project. Independent entities are accredited by the JI
Supervisory Committee.

Internal Rate The discount rate that results in a net present value of zero (NPV = 0) for a series of
of Return (IRR) future cash flows (see the definition of the NPV below). IRR is the discount rate
below which an investment results in a positive NPV (and should be made) and
above which an investment results in a negative NPV (and should be avoided). It’s
the break-even discount rate, the rate at which the value of cash outflows equals the
value of cash inflows. In that sense the IRR represents an investment cut-off rate
because it permits project investors to avoid investments/projects where the IRR is
less than the capital cost (or less than a specified minimum desired rate of return).

Joint Implementation Defined in Article 6 of the Kyoto Protocol. Joint Implementation allows Annex 1
Parties to implement projects that reduce emissions, or remove carbon from the
air, in other Annex 1 Parties, in return for emission reduction units.

Kyoto Protocol The Kyoto Protocol was created at COP 3, Kyoto, 1997. It specifies the level of
greenhouse gas emission reductions, the deadlines and the methodologies that
signatory countries are to adhere to. Legally- binding emissions obligations for
Annex B parties range from an 8 per cent emissions reduction (such as for various
European nations) to a 10 per cent increase in emissions (i.e. Iceland) relative
to 1990 levels of emissions. The Protocol is subject to ratification, acceptance,
approval or accession by Parties to the Convention. It shall enter into force on the
ninetieth day after the date on which not less than 55 Parties to the Convention,
incorporating Annex I Parties which accounted in total for at least 55 per cent of
the total carbon dioxide emissions for 1990 from that group, have deposited their
instruments of ratification, acceptance, approval or accession.

Leakage For land use change and forestry activities, leakage is the unexpected loss of net
(GHG Emissions carbon sequestered. For CDM/JI projects, leakage result from a number of unforeseen
Leakage) circumstances, including improperly defined baseline, incorrectly described project
lifetime and/or project boundaries and/or inappropriate project design.

Learning By Doing A capacity development strategy which entails the development of knowledge
and experience about a particular process by actively engaging in it.

Legal Entity Trading Kyoto Protocol Annex B parties may authorize companies to take part in interna-
tional emissions trading if such trading complies with international emissions
trading rules. These rules stipulate that trading may not happen if the authoriz-
ing country fails to meet certain eligibility requirements.
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 TERM DEFINITION

Millennium Declaration The UN General Assembly Declaration adopted in September 2000 a plan to sup-
port global development objectives in this century. These goals are commonly
known as the Millenium Declaration Goals (MDGs).

Millennium A set of eight development goals with 18 specific targets adopted by the 2000
Development Goals Millennium Declaration committing to the eradication of extreme poverty and
hunger, achievement of universal primary education, promotion of gender equality
and empowerment of women, reduction of child mortality, improvement of mater-
nal health, combating of HIV/AIDS, malaria and other diseases, ensuring environ-
mental sustainability, and promotion of global partnerships for development.

Monitoring An exercise in measuring, recording and reporting the key emissions data
during project implementation (both JI and CDM) to oversee the reduction of
greenhouse gas emissions.

Multilateral CDM A multilateral CDM project involves the investor country, a host country and
third party provision of a share of implementation financing.

Net Present Value The value of future cash flows discounted back to the present by the lowest desir-
able rate of return – often the project’s cost of capital.

Non-Annex 1 Party Countries not included in Annex I of the UNFCCC. Non-Annex I countries do
not have binding greenhouse gas emission reduction targets under the terms of
the Kyoto Protocol.

Operational Entities An entity charged with validation and registration of a CDM project activity.
All operational entities are accredited by the CDM Executive Board, which makes
recommendations to the COP/MOP for the designation of operational entities.

Option Payment The amount paid for the right to buy or sell a given commodity at an agreed
(strike) price at a predetermined date (expiration). If the option is not
excercised by the expiration date, the contact becomes void and the fee paid
for the contact (premium) is forfeited.

Project Boundary According to the Marrakech Accords (2001), a CDM project boundary encompasses
all anthropogenic emissions by sources of greenhouse gases under the control of
project participants, whereas such emissions are significant and directly attributa-
ble to the CDM project activity. Under this designation, a project boundary repre-
sents the border surrounding the zones/areas impacted by the reduction of such
anthropogenic greenhouse gas emissions under the control of a CDM project.

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TERM DEFINITION

Project Design A document required by the CDM Executive Board for project approval
Document (PDD) (i.e., registration and issuance of project-specific CERs). PDDs can be prepared in
a simplified and highly-standardized format for small-scale CDM projects (see
the small-scale CDM definition below) and in the non-standardized expanded
format for other CDMs.

Project Idea Note A draft document outlining all project realization steps including responsible
(PIN) parties, temporal framework of project implementation, budgetary deviations,
specific asset management requirements, etc. Generally used for marketing a
project investment

Removal Units (RMUs) The new technical term representing sink credits generated in Annex I countries,
which can be traded through the emissions trading and JI mechanisms.

Sink A natural reservoir that can absorb or ‘sequester’ carbon dioxide from the atmos-
phere. Forests represent the most common form of sink. Other natural reservoirs
include soils, peat, permafrost, ocean water and carbonate deposits in the deep
ocean.

Small-Scale Projects CDM projects with the following characteristics:

1. Renewable energy activities with the maximum output capacity of 15 MW
(or an appropriate equivalent);
2. Energy efficiency improvement activities that reduce energy consumption
on both the supply and demand side by an equivalent of 15 GWh/year
(gigawatthours per year); or
3. Other activities that both reduce anthropogenic emissions by sources and
directly emit less than 15 KT (kilotons) of CO2-equivalent annually.

Spot market A market in which goods, services, or financial assets are traded for immediate delivery.
This differs from a futures market, where the delivery will be made at a future date.

Sustainable Development that meets the present needs of the people without compromising the
Development ability of future generations to meet their own needs (World Commission on
Environment and Development, 1987).

Technology Transfer A wide range of arrangements by which energy-efficient and/or low-emissions tech-
nologies developed by the industrialized economies are made available to less indus-
trialized states. Technology transfer may occur through technology sales by private
entities, through government programmes (by the means of both subsidies and
grants), non-profit arrangements, or through the combination of any of the above.

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 TERM DEFINITION

Tradable Emissions An authorization issued by the national government that allows an emitter of
Permit greenhouse gases (or of any other conventional pollutant) to discharge a specified
number of emission tons. The permit expires once the stipulated number of tons
has been emitted. The total number of permits in any tradable market equals the
desired level of emissions sought by the regulating authorities.

Transaction Costs An economic definition of transaction costs describes them as expenses spent on
measuring what is being exchanged and enforcing agreements associated with a
particular exchange – in our case, a CER purchase. In legal terms, transaction
costs comprise the expenses incurred buying or selling emissions reduction
credits. These may include brokers' commissions, project verification costs and
any form of project negotiation expenses, including legal fees.

Unilateral CDM Projects developed by indigenous parties within an developing economy without
project investment from Annex I Party(ies). The decision about allowing
unilateral CDM was made at COP-7, after which developing countries are permitted
to market the resulting CERs to potential buyers.

Validation An assessment of the design of a CDM project which is required for all CDM
projects, carried out by an operating entity. It represents an analysis of a Project
design document to assess: project design, baseline study and monitoring and
verification plans.

Verification CDM project verification provides independent assurance that actual or expected
emission reductions have been/will be achieved from a stipulated emission
reduction project during a specified period. In most cases, verification focuses
on the monitoring phase of CDM projects.

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