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Activities Implemented Jointly (AIJ)


Methodological Issues

 

WORK ON METHODOLOGICAL ISSUES

At its fifth session, the Subsidiary Body for Scientific and Technological Advice (SBSTA) requested the secretariat to develop practical options with regard to an indicative list of methodological issues related to activities implemented jointly under the pilot phase. The secretariat has undertaken work for that purpose with the support of Parties and in collaboration with a number of partners. Preliminary findings, obtained by consulting with experts, on the issue of the determination of environmental benefits, may be found below. Such initial findings will be utilized in developing practical options.

A. The Reference Case / Baseline Scenario

Activities implemented jointly (AIJ) must fulfil the criteria of decision 5/CP1, to "bring about real, measurable and long-term environmental benefits related to the mitigation of climate change that would not have occurred in the absence of such activities" (paragraph 1(d)).

The baseline for an AIJ project is a counterfactual construct, a scenario that may never actually unfold. The baseline for an AIJ project defines the scenario that would have occurred in the host country in the absence of the activity implemented jointly. The baseline scenario is the necessary foundation for calculating, by comparison, the global environmental benefits that would accrue if the AIJ project were successfully completed.

Credible baselines are critical to determining the environmental benefits of activities implemented jointly.

Guidelines for the determination of AIJ baselines would be useful in promoting transparency and comparability in activities implemented jointly.

1. Characterizing the Baselines

The calculations underlying the baseline for each AIJ project need to be sufficiently transparent in order to allow Parties to the UNFCCC to verify the estimates or reproduce the calculations, should they choose to do so.

All activities implemented jointly require project-specific baselines. The methodologies used in calculating the baseline scenario may be sector-specific, technology-specific or country-specific.

The baseline scenario for an AIJ project should be constructed ex ante and should include an indication of greenhouse gas emissions expected to occur in the absence of the AIJ project.

A variety of technologies could be envisaged as central to the construction of the baseline scenario. For purposes of constructing the baseline and estimating the incremental environmental benefits of an activity implemented jointly, preferential consideration should be given to using the technology which would have been the most likely marginal addition to the host country economy. By contrast, using the average technology available in the host country as the foundation for the baseline may lead to an exaggerated and inaccurate estimate of the expected environmental benefits from the AIJ project.

(a) System Boundaries

System boundaries for AIJ projects should be appropriate to the scale and complexity of the activity, so as to incorporate consideration of possible leakage.

For the purposes of constructing the baseline for an AIJ project, the relevant system boundary and timeframe should be determined by the project participants and approved by the governments of the investing and host countries. This agreement should be accessible to the Parties to the UNFCCC in order to verify the assumptions, should they choose to do so.

In many cases, the relevant system boundary for the baseline of an AIJ project is the border of the site of the proposed activity. In other cases, the systemic effects of the AIJ project may be captured more completely if the boundary is defined by a network of inter-connected facilities, for example an electric utility grid, or by an economic sector like transportation or forest products.

(b) Time Frames For Activities Implemented Jointly

The project participants, acting in accordance with accepted guidelines, will establish the time frame or duration of an activity implemented jointly. The selection of a relevant time frame may be guided by consideration of the technical or financial characteristics of the activity or by policy factors.

For example, in projects with equity financing, a relevant time frame for the determination of environmental benefits could be the engineering or operating lifetime of the project. In projects with debt financing, a relevant time frame may be the amortization or depreciation lifetime of the project.

Future attention should be given to those cases in which the annual net environmental benefits of an AIJ project become negative during the life of the project.

(c) Enduring or Dynamic Baselines

The calculated baseline for each AIJ project should remain fixed, so as to ensure predictability for investors.

However, for projects with long lifetimes, the participants may propose revisions to the project baseline at appropriate intervals. Any such changes should be approved by both host and investing countries. They must be reported to the secretariat of the UNFCCC. Such changes could be subject to challenge by other Parties to the Convention.

For a given class of projects, the appropriate methodology of constructing baseline scenarios may change over time.

Technological change or change in the policy context of the host country, for example, may lead to changes in the method for calculating baseline scenarios.

(d) Precision in the Determination of Environmental Benefits

The precision required in determining environmental benefits from activities implemented jointly should be commensurate with the scale and complexity of the activity. The degree of precision in the baseline need not exceed that which is needed for the measurement of the performance of the project.

An issue that will require further work is how to prevent systematic errors in the calculation of AIJ baselines.

(e) Verification of Environmental Benefits by Independent Third Parties

Carbon emissions offsets have never been traded internationally before. Technical limits in estimating the environmental benefits and economic value of these emissions offsets reliably may add uncertainties to the evaluation of AIJ projects, compared to the normal array of risks associated with more traditional investments. These uncertainties suggest the need to establish a process for verification of the environmental benefits of AIJ projects.

One option for the verification of AIJ baselines involves the use of independent, third-party auditors. Third-party verification can be used to assess the credibility of AIJ baselines and of the related calculation of environmental benefits. Such verification procedures should confirm that the guidelines of the Conference of the Parties (COP) have been applied in a reasonable manner and that the data supplied by the project participants is credible.

Third party verification may not be necessary for all AIJ. Random audits of AIJ baselines may be sufficient to establish the credibility of the process. Alternatively, the verification process could be initiated on a specific project following a request from either a project participant or another Party to the UNFCCC.

B. Environmental Benefits

Decision 5/CP.1 provides Athat activities implemented jointly should bring about real, measurable and long-term environmental benefits related to the mitigation of climate change that would not have occurred in the absence of such activities@ (paragraph 1(d)).

The estimated environmental benefits related to the mitigation of climate change of an activity implemented jointly (AIJ) are equivalent to the difference between the quantity of greenhouse gas (GHG) emissions released or sequestered as a result of the activity and the amount of GHG emissions that would have been released or sequestered in the baseline or reference scenario. If defined in this way, the estimated environmental benefits should take into consideration any possible leakage.

In assessing the environmental benefits of an activity implemented jointly, it is important to ensure that the claimed benefits fulfil the criteria of decision 5/CP.1. That is to say that the claimed benefits are real, measurable, long-term and additional.

The environmental benefits related to the mitigation of climate change of an AIJ would be recognized as real if the actual GHG emissions or sequestration can be shown to differ from a credible and probable baseline scenario, taking leakage into account. In the case of an GHG emission project, the actual GHG emissions in the project case must be lower than the projected GHG emissions in the baseline scenario. In the case of an GHG sequestration project, the actual rate of sequestration in the project case must be higher than the projected GHG emissions in the baseline scenario.

The environmental benefits of an AIJ related to the mitigation of climate change are considered to be measurable if the actual level of GHG emissions of the project case and the level of GHG emission in the baseline scenario can be established with a reasonable degree of certainty. The degree of certainty in each case will need to be determined. Direct measurement is the preferred method for observing emissions in the project case. This may not be possible in the baseline scenario, which is often a counterfactual case.

The environmental benefits of an AIJ related to the mitigation of climate change can be recognized as long-term if the emissions avoidance or sequestration are sustainable, i.e. they persist over an appropriate period of time which may extend beyond the life of the project.

The environmental benefits of an AIJ related to the mitigation of climate change can be recognized as additional if it can be demonstrated that the resulting environmental benefits related to GHG would not have otherwise occurred. Several methods are currently being used or developed to demonstrate this additionality. Possible methods include:

(a) Measuring additionality for an AIJ against a credible, quantitative baseline;

(b) Defining narrow categories of activity types whose emission benefits will a priori be considered additional; or

(c) Assessing additionality by evaluating whether an AIJ overcame financial (not to be confused with the aspects dealt with in the next section), institutional, technological, or other barriers to project development.

Guidelines should be developed to facilitate the determination of environmental benefits related to the mitigation of climate change. Such guidelines should provide a set of internationally accepted methods of executing the necessary calculations and evaluations of environmental benefits generated by an AIJ. In some cases, those guidelines could allow for a choice between such recommended methods or a combination of them.

C. Financial Additionality

Decision 5/C.P.1 provides "that the financing of activities implemented jointly shall be additional to the financial obligations of Parties included in Annex II to the Convention within the framework of the financial mechanism as well as to current official development assistance (ODA) flows" (paragraph 1(e)).

This financial additionality should not be confused with the assessment of the financial feasibility of potential AIJ/Joint Implementation (JI) projects as an indicator of the environmental additionality of a project, if this indicator is to be used for such purposes.

The issue of financial additionality may become less significant after the pilot phase when emissions reductions are credited, assuming that considerably more private funding of JI will then take place. By definition, private funding is not ODA. Besides, it is unlikely that the private sector will contribute directly to the financial mechanism of the Convention.

Among ways to operationalize financial additionality conceivable options include establishing a link between the recognition (or the crediting when established) of an AIJ with the level of ODA and contributions to the financial mechanism of the Convention, as well as excluding strictly from AIJ funding any ODA or GEF funding.

D. Compatibility and Supportiveness of National Priorities

Activities implemented jointly should be compatible with and supportive of national environment and development priorities, especially in host countries. In this regard, it is important that designated national authorities of host Parties who are charged with the responsibility of approving AIJ have the capacity to ascertain whether the proposed activities are compatible with and supportive of national environment and development priorities and strategies. Individual Parties may establish their own criteria for acceptance of AIJ-projects, such as capacity building and transfer of appropriate technology.

E. Possible Approaches and Need for Additional Work

To strengthen the credibility of the AIJ regime, guidelines and methodologies for establishing AIJ baselines should be developed. The degree of detail necessary in these guidelines and methodologies remains to be determined.

Methodologies for the determination of environmental benefits should meet the following criteria of credibility, transparency, operational simplicity and predictability. The Parties to the UNFCCC require that these methodologies be both credible and transparent. Project participants need methods that are simple to apply, user-friendly, and involve low transaction costs. Private investors require a measure of predictability in the application of the guidelines so that they may gauge the value of AIJ projects.

The guidelines for preparing AIJ baselines should provide project participants with several options. One option might include the use of tools such as simplified methodologies, matrices and analytic typologies. A second approach might include the use of some simple paradigmatic illustrations that could be followed by project participants in the construction of typical baselines. Yet another option could allow the project participants to construct more elaborate baseline scenarios based on sufficient country-specific and site-specific data.

Additional work may be needed in the following areas (not in an order of importance):

(a) Development of guidelines:

(i) at a level of specificity which needs to be determined; (ii) with respect to system boundaries and consideration of leakage; (iii) for the preparation of sector-specific and technology-specific baselines; and (iv) to prevent systematic errors in the determination of AIJ baselines;

(b) Identification of sectors and technologies which are to be given priority in this process of methodological work and identification of indicative criteria for these sectors and technologies;

(c) Definition of narrow categories of projects that could be assumed on an a priori basis to provide additional environmental benefits;

(d) Consideration of activities in which estimated emissions in the project case reach or exceed the level of estimated emissions in the baseline;

(e) Institutional issues that would need to be addressed in a post-pilot phase with regard to crediting, if such crediting were agreed to by the Parties;

(f) Establishment of appropriate procedures and mechanisms for third-party verification (Such work might be enriched by drawing upon lessons learned from the Helsinki Process on Tied Aid.);

(g) Clarification of the operational definition of financial additionality with regard to ODA;

(h) Further exploration of the issue of "perverse incentives" and their implications;

(i) The operational determination that environmental benefits are real and are long-term;

(j) The possibility of earning credits in the future for focused capacity-building activities; and

(k) The problem of how to value benefits other than GHG emissions reductions or sequestration.


Contact: 

UNITED NATIONS - Climate Change Convention Secretariat 
Attn. Kai-Uwe B. SCHMIDT (Mr.) 
P.O. Box 260 124, 
D-53153 Bonn 
Germany 

Telefax: (49 228) 815 1999 
Direct E-mail: kschmidt@unfccc.int