ARTICLE 6 APPROACH PAPER SERIES Considerations for CDM Methodology Concepts to Article 6.2 Mechanism © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution Please cite the work as follows: The World Bank. “Considerations for CDM Methodology Concepts to Article 6.2 Mechanism,” World Bank Working Paper, Washington, DC. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Design by Clarity Global Strategic Communications (www.clarityglobal.net) Table of Contents Abstract i 1. Introduction & Objectives 1 2. Considerations for Article 6.2 baselines 2 3. Managing risks with Article 6.2 baselines 5 4. Testing Article 6.2 concepts with CDM methodologies 7 5. Conclusions 10 Annex 1 11 Annex 2 15 Acknowledgements This technical approach paper has been written for the Climate Warehouse Program at the World Bank, which seeks to operationalize Article 6 through piloting activities. The paper has been prepared jointly by a team of experts that includes Jessica Wade-Murphy (Atmosphere Alternative) and Sandeep Kanda (World Bank). Harikumar Gadde (World Bank) and Seoyi Kim (World Bank) provided substantive inputs and managed the project. Chandra Shekhar Sinha (World Bank) provided valuable comments and suggestions to the authors. This work also benefited greatly from consultation with the Climate Market Club. The Climate Market Club, as of September 2023, has representatives from 14 countries and five non-sovereign entities as its members with the MDB Working Group on Article 6 acting as the secretariat. ARTICLE 6 APPROACH SERIES i Considerations for CDM Methodology Concepts to Article 6.2 Mechanism Abstract The Clean Development Mechanism (CDM) under Furthermore, the approach paper explores how NDCs, the Kyoto Protocol has seen the development of over sector targets, policies, and regulations can be factored 250 project-based methodologies for establishing into baseline considerations within the framework of baseline emissions, assessing additionality, Article 6. It assesses some of the broadly applied CDM monitoring project activities, and measuring & baseline methodologies: (i) on-grid renewable energy verifying emission reductions. The implementation (ACM0002); (ii) landfill gas activities (ACM0001); as of these methodologies over the years has provided well as (iii) grid extension (AMS-III.BB); and Tool 07 on valuable experiences and lessons that could inform emission factor for an electricity system, with regards to baseline-setting methods under Article 6 of the Paris the adherence under the Paris Agreement Article 6 and Agreement (PA) to ensure environmental integrity, provides recommendations for potential adjustments. increased mitigation ambition, and the achievement of Nationally Determined Contributions (NDCs). Overall, the paper concludes that while the portfolio of CDM methodologies can serve as a In this context, this approach paper delves into reference, baseline setting under Article 6 must components of CDM methodologies that require go beyond the CDM baseline determination reassessment for the transition from the Kyoto to the method that relies on historical practices and take Paris regime. It draws from past CDM experiences a forward-looking approach that considers NDC to identify useful insights that can be applied to targets and trajectories and ambition-raising. the new toolkit. It builds on lessons learned from baseline establishment under CDM and recent recommendations by the Article 6.4 Supervisory Body on the development of mechanism methodologies. It identifies the key risks (over-crediting/over- selling and risk of perverse incentives) that need to be addressed, and crucial elements (ratcheting- up of ambition) that need to be considered for robust Article 6 baseline-setting that aligns with new requirements under the Paris Agreement. 1 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES Nevertheless, many CDM methodologies are 1. Introduction & refined tools that could potentially contribute to the construction of Article 6.2 mechanisms and actions. Objectives This approach paper examines some of the key aspects of CDM methodologies that need to be re- examined during the change in regime from Kyoto to Article 6.2 of the Paris Agreement aims to contribute Paris, and lessons learned from CDM methodologies. to reducing global greenhouse gas (GHG) emissions by providing a cooperative structure to achieve Additionally, it examines how NDCs and sector mitigation. To achieve its intended aims, the targets, policies and regulations may be accounted Article 6.2 mechanism needs to become operational for baseline considerations in the Article 6.2 context, as soon as its rules, modalities and procedures and where CDM baseline determination methods are established. It is clear that there is a very brief might be adapted or adjusted for alignment with period within which global emissions should peak the requirements in the context of NDCs. and subsequently decrease, to achieve the global temperature goals of the Paris Agreement. Unlike the availability of IPCC guidelines for GHG Mitigation Outcome Transfers emissions accounting, no international guidelines and Climate Finance currently exist for GHG mitigation accounting. However, over the past two decades, the baseline The Paris Agreement establishes general and monitoring methodologies developed under methods for financing actions that contribute the Clean Development Mechanism (CDM) to its goals. The market approaches for have provided a familiar and broadly accepted transferring mitigation outcomes (MOs), which basis for baseline determination, additionality consider trading of MOs with similarities to ex- demonstration, and both ex-ante estimation and post, results-based carbon finance, are stated ex-post determination of emission reductions in in Article 6. Non-market approaches have mitigation projects and programmes of activities also been established, but are not discussed (PoA). Furthermore, these methodologies have not just here. Article 9 establishes climate finance, been used under CDM but also in other compliance which assists Parties with both mitigation and programmes (e.g., Joint Implementation-JI) and adaptation through a variety of instruments independent standards, (e.g., Gold Standard- GS and sources, with a particular role for public and Verra Verified Carbon Standard- VCS). funds. This approach paper relates to the first of these two categories of finance and is called According to the Paris Agreement text, Article 6.2 “carbon finance” here. Apart from acting as activities must contribute to Parties’ Nationally an incentive instrument prompting climate Determined Contributions (NDC) achievement, friendly activity, some mitigation action types, ambition raising, and sustainable development or sectors may be better suited to using carbon through cooperation while ensuring environmental finance; for example, where periodic results- integrity. Here, ambition raising is considered to based financing supports sustainable operation mean that the mechanism could facilitate more and maintenance. Other mitigation types may progressive and higher-impact action. The CDM obtain more appropriate assistance from other methodologies, although being the stronghold climate finance instruments, for example, when in the pre-2020 regime, do not appear to be fully a very large initial investment is required, and aligned with Article 6.2 principles, particularly the the impact quantification is complex (e.g. some considerations of NDC targets and trajectories and public infrastructure development). In the case ambition raising. Many of the CDM methodologies of carbon finance, it is especially pertinent to have sought to define business-as-usual practices consider how to balance incentives for private by considering historical practices against which sector investment with environmental integrity. project emissions are compared, with an approach that looks toward the past, rather than the future. ARTICLE 6 APPROACH SERIES 2 (iii) An approach based on existing actual or 2. Considerations historical emissions, adjusted downwards to ensure alignment with paragraph 33 of the RMP. The application of the BCFs may be required. for Article 6.2 Mechanism methodologies must justify the baselines appropriateness of their chosen baseline approach and consider guidance from the Supervisory Body. Host Parties may specify baseline approaches and In the CDM, one of the central components of determine more ambitious baseline requirements at methodologies was the baseline determination their discretion. procedure. Baseline determination will be equally important in the Article 6.2 mechanism, and the In light of the above recommendations proposed by the procedures to do so are still to be defined. However, Supervisory Body and the lessons learned from CDM the RMP encourages the implementation of mechanism methodologies, Article 6.2 baselines should contribute methodologies that remove barriers to the deployment towards and address the following issues: of clean technologies and encourage ambition over time. This can be achieved by increasing the stringency • Controlling the risk of over-crediting/ of baselines and developing Baseline Contraction over-selling: The seller/host country may Factors (BCFs). Mechanism methodologies should inadvertently transfer its mitigation outcomes also be real, transparent, conservative, credible, internationally in excess, potentially jeopardizing and below business as usual, ensuring that the its ability to meet its own set NDC target(s) results of activities represent actual reductions in due to overselling. Alternatively, the buyer GHG emissions and provides credible methods for country may unwittingly purchase an excess of estimating emission reductions. Baselines should be internationally transferred mitigation outcomes demonstrated as being below business as usual, and (ITMOs) without considering whether the seller mechanism methodologies should help equitably share country will meet its own NDC target. In either the mitigation benefits between participating parties. of these cases, the baseline setting could help This can be achieved through robust, transparent, and abate the risk of the host country overselling user-friendly measurement, reporting, and verification and impart confidence to the buyer country. systems that avoid double-counting risks and use data- driven and publicly available performance standards. • Ratcheting up ambition: All Parties to UNFCCC are requested to submit new rounds of NDCs In the draft recommendations on requirements for (new NDCs or updated NDCs) every five years the development and assessment of mechanism (e.g. by 2025, 2030), regardless of the respective methodologies submitted for the 6th meeting of implementation time frames.¹ Further to this, the Article 6.4 Supervisory Body, a performance-based successive NDCs should be more progressive than approach for setting baselines is highlighted. Each the previous NDC and the baseline setting should mechanism methodology is required to choose one be progressive too. The management of a situation of the following performance-based approaches: when the baseline period of an Article 6.2 action straddles two NDCs needs to be considered (i) Best available technologies that represent an economically feasible and environmentally • Avoid penalizing climate-friendly government sound course of action, where appropriate. pledges and policies: The baseline setting should not incentivize short-term gains over (ii) An ambitious benchmark approach where the long-term decarbonization and should rather baseline is set at least at the average emission support implementation of climate-friendly level of the best performing comparable policies (fiscal or non-fiscal) and pledges. activities with similar outputs and services in a defined scope in similar social, economic, environmental, and technological circumstances. 1 As per the NDC synthesis report by UNFCCC, almost all Parties communicated an NDC implementation period until 2030. 3 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES Furthermore, Article 6.2 baseline setting may be Unconditional target: the Party considers the part of a two-step process to promote unit quality: target attainable using its own resources (financial, capacity, technology) in the time-frame defined in the • Baseline setting references the stringent corresponding NDC. NDC, or other criteria if stringency of the NDC is not ensured (related criteria potentially Conditional target: The Party considers it unfeasible may be defined in Article 6.2 RMP), and to attain the target on its own, but identifies that with support, which includes financial, capacity, and/or • Environmental integrity is checked technology support, the target is attainable. Conditional through an NDC assessment. targets may be seen as aspirational targets. The former relates to the volume of mitigation Under these definitions, while NDCs are the starting outcomes (crediting) being generated, and the point for the application of Article 6.2, it may not be latter is linked to the suitability of the mitigation feasible or necessary to consider the NDC impacts outcome being transferred between Parties.2 in baselines for all Article 6.2 actions, in particular, mitigation actions toward conditional targets or At the same time, the nature and level of detail mitigation beyond the NDC. Here, three potential of NDCs vary greatly. Many NDCs do not lend ways to consider unconditional versus conditional themselves to forming the direct basis for a targets in Article 6.2 baseline setting are presented. numerical baseline for a site-specific or sector- wide mitigation action. However, it would be 2.1. CDM methodologies and experience counterproductive for the variations in NDCs to contributions to Article 6.2 baseline prevent the cooperative actions made possible setting methods by the provisions of Article 6.2. Methodologies for baseline determination methods may play a role It is widely recognized that the development of in determining the procedure for setting baselines CDM methodologies has been complex and time that address the needs of this mechanism. For intensive. Furthermore, its application was hampered example, the baseline methodology could provide by its complexity and substantial data requirements some default values that would eschew the need for for individual private companies or governments the NDC to be the basis for baseline determination, with capacity constraints. These challenges were where the NDC is general, or its stringency cannot experienced in the context of a mechanism that be determined. In other cases, the NDC still could frequently focused on the use of historical data and be a reference point for the baseline setting. baseline conditions for a single location. There is a risk that the Article 6.2 mechanism could become NDCs also vary in the nature of the targets they overburdened with complex requirements for baseline contain. NDCs have differentiated unconditional setting related to interpretation of highly variable NDCs, targets, conditional targets, and some NDCs thereby hampering the application of the mechanism include economic sectors or areas of the economy and its potential to contribute to NDC achievement, completely outside the NDC. One of the difficulties ambition raising and sustainable development. in capturing conditionalities in the baseline is that Therefore, one of the goals for Article 6.2 baseline Parties have defined conditionality differently. setting could be simplicity. Simplicity in baseline In this approach paper, the following standard setting could be achieved by enabling a greater trade- characterizations of conditionality are proposed: off between accuracy and environmental integrity of 2 As discussed in the Article 6 Approach Paper 1, Ensuring Environmental Integrity under Article 6 Mechanisms. ARTICLE 6 APPROACH SERIES 4 baselines, where appropriate. Lower accuracy but methods and transportation modal-shift. For other higher environmental integrity in simplified baseline cases, however, both environmental integrity and setting methods could provide the basis for growth accuracy can be achieved simultaneously. Examples of the number and scale of mitigation actions. This of such project types are forest carbon stocks approach could be suitable for sectors or project measured using satellite and artificial intelligence (AI) types where it is challenging or prohibitively expensive monitoring, high-precision metering of renewable to obtain measurements, such as some household energy electricity generation, among others. energy use improvements, aerobic waste management Table 1: Alternatives for incorporating conditionality of NDC targets in Article 6.2 baselines Example: Electricity sector NDC Unconditional goal: Add 100 MW of renewable capacity Conditional goal: Add 400 MW more renewable capacity Alternative to consider Example Example baselines Mitigation Indicative conditionality of actions outcomes incentives or targets in the baseline financing3 Baseline considers First 100 MW of Baseline emission No mitigation National sources absolute achievement new renewable factor equal outcomes for of unconditional NDC capacity to project international installed transfer achieved Next 400 MW Baseline emission Mitigation Carbon finance, renewable factor set at a outcomes achieved climate finance capacity static or dynamic installed reference level Baseline considers First 500 MW of Baseline emission Mitigation National sources4 proportional new renewable factor set at four- outcomes achieved + Carbon finance achievement of capacity fifths reference level for proportion of unconditional NDC installed achievement that is conditional Baseline considers First 500 MW of Baseline emission No mitigation National sources achievement of both new renewable factor equal outcomes for + climate finance unconditional and capacity to project international conditional NDC installed transfer achieved Any further Baseline emission Mitigation Carbon finance, renewable factor set at a outcomes achieved climate finance capacity static or dynamic installed reference level This list is non-exhaustive 3 The host country could consider domestic incentive schemes to avoid “early mover” disadvantage for the first 100 MW that would not receive 4 international carbon finance benefits. 5 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES For example, if the government has defined a 2035 3. Managing risks target emission factor for grid electricity, then potentially, the emission factor in 2025 should be consistent with a path toward achieving the 2035 target. with Article 6.2 Regardless, baseline setting should not factor in baselines new regulations or policies that increase emissions, unless there are circumstances where basic human needs are not being met, similar to “suppressed 3.1. Consideration of policies demand” circumstances applied under the CDM and some voluntary programs. When considering planned There is consensus that regulatory requirements be regulations for determining the crediting baseline, it is considered when establishing a baseline for Article important to examine the rationale and exclude those 6.2 mitigation. However, there are questions regarding that would increase emissions. Strive to attain the most whether or how to incorporate policies promoting realistic view possible of the likely baseline emissions. climate-friendly technologies and practices, especially If obtaining this view proves overly burdensome, apply those that have not yet been regulated. There may be simplifications that prioritize environmental integrity. concern from governments if the approval of more ambitious policies mean Article 6.2 actions in their Policies directly related to achieving countries will lead to lower crediting of mitigation unconditional NDC targets outcomes, and this concern could influence countries to reject policies that would support increased Expected policy impacts should be accounted for in ambition. mitigation baselines. Potentially, a dynamic baseline could reflect the anticipated change in impact of However, research and experience on CDM impacts a policy over time, which could incentivize early showed that the risk of perverse incentives was movers. Alternatively, a static baseline could assume considerably lower than expected, while the risk uniform policy impact, for simplicity. Assuming that of over-crediting was substantial (Spalding-Fecher the baseline emission factor would be higher in the 2014). These cases may have similar levels of risk earlier years, as opposed to a static factor, may under Article 6.2, which may even be lessened since incentivize early action in some circumstances. all countries now have contribution targets to meet and over-crediting could impede NDC achievement. The baseline for mitigation outcomes may be set in Long-term strategies and such a way that if emissions would follow the project’s Article 6.2 baselines baseline scenario, the host country’s unconditional While the mid-century long-term low GHG contribution could still be reached. In other words, the emissions development strategies are expected baseline scenario could be constructed considering to be important instruments for guiding the the future impacts of some policies indicated in the long-term trajectory to low GHG emissions, it country’s NDC. Since the NDC baseline setting may may be more realistic not to require these to tend to look toward future circumstances, unlike be considered initially in Article 6.2 baseline CDM baselines that tend to consider past practices, setting, but rather begin by determining it could be consistent to include the intended future baselines that support neither overselling, nor impacts of some policies in the baseline determination. over-crediting and are consistent with the NDC, Other national policies, such as planned regulation prioritizing a quick-start to the operation of relevant to the activity, and carbon pricing schemes Article 6.2. The appropriateness of incorporating in place, may also play an important role in capturing long term strategies in Article 6.2 baseline the host country context reasonably in the baseline. definition can be reconsidered in the future. ARTICLE 6 APPROACH SERIES 6 Figure 1. Example alternatives for incorporating of non-renewable biomass, a net-to-gross discount policy impacts in baseline definition of 5% is applied to the emission reductions, to avoid over-crediting. Or, for example, under AMS-III.AR for substituting fossil fuel-based lighting with LED/CFL lighting systems, the default crediting is limited to two years, effectively using a shortened crediting period to Baseline EF Dynamic baseline abate the risk of over-crediting. The role of methodology is to ensure the accuracy of the mitigation outcomes, or if accuracy is difficult to achieve, it must at least ensure Static baseline that the mitigation outcomes are not overestimated. The methodology will not define the price of the mitigation outcomes. However, it can generate accurate baselines and allow the host country to make Time 2030 the most informed decision regarding the number and price of mitigation outcomes to be transfered, while taking the opportunity cost into account. It may not be necessary to account for expected policy impacts in mitigation baselines when the policies are 3.3. Frequency of baseline update/ related to achieving conditional NDC targets. This validity of baseline relates to the future consensus on the nature of the conditionality of targets. The alternatives presented in It may be appropriate to relate Article 6.2 baselines Table 1, above, provide an example of some of these to the timeframe of NDC target updates. Baseline alternatives. Similarly, in mitigation baselines, it may setting may be based on the most recently published not be necessary to account for policies promoting NDC. In other words, every five years, the policy lower emissions for sources unaddressed in the NDC. context would be reviewed for updating the baseline. 3.2. Controlling the risk of over- While aligning the crediting period with the NDC crediting or over-selling implementation timeframe may mitigate the risk of overselling, the importance of investment security To abate the risk of host countries overselling for private sector investors is also relevant. A and impart confidence to buyer countries, some longer crediting period with less frequent baseline alternatives include: adjustment provides more investment security. For some project types, especially those with a longer • setting the baseline at a level below business-as- payback duration, this may make a significant usual, leading to reduced crediting of reductions difference in terms of commercial viability. It may be that carbon finance will be more suitable for • curtailing the amount by which mitigation project types that require shorter payback times, outcomes accrue (credit discounting) whereas those with long payback times may be more suited to other climate finance instruments. • limiting the period that mitigation outcomes accrue (shortened crediting period) With respect to the frequency of baseline updates, some of the alternatives are to: • restricting the transfer of mitigation outcomes (credit set-aside/reduced transfer). • maintain the baseline for five years or longer, providing better predictability With respect to the potential role for CDM but, potentially, lower ambition; methodologies, there is the possibility to adapt or adjust them to set baselines at below business-as- • require projects with crediting periods that usual levels. The other three alternatives for controlling straddle an NDC update, to update the baseline these risks could be defined by host country policy or once a new NDC is published, providing be addressed directly in the baseline methodologies. higher ambition but lower predictability and For example, in CDM methodology AMS-II.G for potentially discouraging investment; energy efficiency measures in thermal applications 7 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES • apply dynamic baseline emission factor setting, The baseline setting approaches could consider accounting for evolving conditions annually, two priorities suggested previously: simplicity, by with low predictability but higher ambition, or prioritizing environmental integrity over accuracy when relevant, and predictability of mitigation • apply a static baseline emission factor, with a outcomes. These priorities may be considered value that is forward-looking to the end of the while also catering to the common but differentiated target period, providing predictability, higher responsibilities (CBDR) and respective capabilities ambition, but possibly lower potential incentives (RC) of the parties to participate in Article 6.2. due to the generation of fewer mitigation outcomes. However, the level of incentive would The following examples test how some of the most also depend on mitigation outcome pricing, which broadly applied CDM methodologies,5 ACM0002 could be driven higher by lower availability. and AMS-I.D, along with the Grid Tool to calculate the emission factor for an electricity system, could be adapted to define baseline emission factors for various country circumstances and NDC 4. Testing characteristics within the context of Article 6.2. Further, Annex 2 provides an example of how the Article 6.2 concepts current Grid Tool could be adjusted to include baseline emission factor determination methods, and Annex 3 gives a justification of the proposed changes. with CDM 4.1. Example 1: NDC with exclusively methodologies conditional target for mitigation in the electricity sector A variety of baseline setting approaches have been In this example, the country has set a target of reduced discussed in the Article 6 negotiations; for example, emissions per MWh, which is unattainable without in the context of Article 6.4, the discussed approaches assistance, or is conditional. In this hypothetical include best-available-technology (BAT), economically scenario, which reflects the goals of some least feasible BAT, performance-based approaches, developed countries and Small Island Developing benchmarks, and projected emissions. The experience States, the current electricity coverage is so limited that of the CDM shows that all these types of approaches the country needs to significantly increase generation may be appropriate, in different country and sector to fulfill the energy requirements of its population. Thus, circumstances. To draw insights from the CDM, there the electricity sector policies may prioritize expanding is an option to develop a rulebook that offers a diverse coverage over expanding renewable generation. set of approaches tailored to different countries and, possibly, sector circumstances. In Annex 1, three Under such circumstances, the existing provisions CDM methodologies are analyzed, and areas where of ACM0002/AMS-I.D + the Grid Tool could be used changes would be required to adapt them to the to determine a combined margin baseline emission Article 6.2 context are identified. The analysis shows factor for electric energy. This would require regular that a significant portion of each methodology could be adjustments to, first, update the baseline emission retained. Apart from editorial changes for consistency factor (e.g. yearly), and second, include new carbon- with the new context, key changes would be required finance driven generation in the baseline emission in the baseline approach. factor, instead of excluding carbon-financed projects as in the CDM. A baseline emission factor derived this way would show ambition, due to its regular update and inclusion of carbon-financed plants, while also acknowledging the stated need for assistance to reach the target by resulting in mitigation The methodologies ‘ACM0002: Grid-connected electricity generation from renewable sources’ and ‘AMS-I.D.: Grid connected 5 renewable electricity generation’ have been used in more than 58 percent of the CDM projects. ARTICLE 6 APPROACH SERIES 8 outcomes for all new renewable energy plants. 4.3. Example 3: NDC with both conditional and unconditional 4.2. Example 2: NDC with exclusively electricity sector targets unconditional target for mitigation in the electricity sector In this case, a country has indicated in its NDC an unconditional target to increase the renewable Under this example, the country sets a target of energy (RE) share in the power sector to 10% by 2030 reduced emissions per MWh and considers the based on an existing RE policy prior to 2015, plus a target attainable using its own resources. To support conditional target to further increase penetration of RE NDC achievement, only action going beyond the in the generation matrix. After the NDC submission, unconditional target would be suitable for transferring the RE development targets and power system mitigation outcomes via Article 6.2 participation. master plan are published, although the country’s previous RE policy targets have not been met. One alternative to define the baseline emission factor could be based on the expected future emission factor In such a case, the baseline emission factor at NDC target attainment, calculated using the same could be determined as follows: CDM Grid Tool methods, via a top-down calculation to be applied by all users, with the following adjustments: • By applying the existing grid tool, particularly if basic human needs regarding energy • Existing grid tool with modified application access are not being met in the country, with for determination of future emission factor to the adjustments proposed in Example 1; avoid over-crediting/over-selling, for example • Modifying the existing grid tool for o Operating margin is based on expected value determination of a future emission factor to in the year of NDC target attainment, and avoid over-crediting and over-selling, with the adjustments proposed in Example 2; o Build margin is based on the anticipated development of technologies in the • Developing a top-down defined emission factor interim for target attainment. for the grid based on modeling; for example, like the EU INNOVFUND value that determined Further, based on the respective NDC and associated a modelled (targeted) 2030 grid emission factor roadmap for achieving the contributions, the host of 0.15 tCO2e/MWh in the ‘methodology for country may: GHG emission avoidance calculation’; or • Differentiate domestic mitigation actions for • an independent, default factor across regions that meeting national contributions from those for provides parity among countries for RE projects, international transfer, by setting a positive list for neither penalizing countries with clean grids nor technologies for mitigation outcomes in this sector; rewarding countries with polluting grids, akin to the default fraction of non-renewable biomass (fNRB) • Provide a top-down crediting baseline based on of 0.3 under the CDM Tool30 Calculation of the sectoral modeling using criteria different to the fraction of non-renewable biomass, version 3.0.6 Grid Tool; and/or • Allow only a percentage share of the mitigation outcomes to be transferred internationally from an activity. https://cdm.unfccc.int/methodologies/PAmethodologies/tools/am-tool-30-v3.0.pdf 6 9 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES 4.4. Comparison of some options for • Baseline example 1: NDC with exclusively defining baselines under Article 6.2 conditional target for mitigation, where the baseline emission factor is based on the annual average The following table compares a typical CDM sector practices and updated each year. baseline determination method, referencing historical practices, with two potential Article 6.2 baseline • Baseline example 2: NDC with exclusively determination methods presented in the earlier unconditional target for mitigation, where examples. The point of reference is a CDM method the baseline emission factor is based on the referencing site-specific historical practices to targeted future emissions intensity level, pegged define the baseline emission factor, and the two to the year of NDC attainment in 2030. potential Article 6.2 example methods are: Table 2: Pros and cons of Article 6.2 baseline options CDM point of Baseline example 1: Baseline example 2: reference: Average sector practices Pegged to targeted Historical practices with regular update 2030 level Simplicity Yes, since methods Somewhat, since method may Somewhat, since the future are site-specific be tied to annual inventory emissions intensity level reporting. However, there is at year of NDC attainment usually a lag in reporting and could be defined once top- the aggregate sectoral data down and applied throughout might be difficult to interpret for the compliance period. project-based activities, but may apply for sectoral level activities. Information/ Low to medium, since High, since data requirements Medium, since one future data requirements site-specific data may would go beyond published year would need to be be readily accessible. inventory data and would analysed in terms of be ongoing since update projected emissions intensity would be yearly. level, including demand projections and impact of NDC and policies. Top-down or Bottom-up Either bottom-up or top- Top-down and made available Bottom-up down, the latter case being by a government or academic like the example of national entity to ease the application governments setting the national by mitigation actions. baseline emission factor for CDM by applying the Grid Tool. Ensuring Unlikely, only if Perhaps, if the evolving Likely, since the emissions environmental historical practices emissions intensity includes an intensity level in the year integrity at site were already uptake of mitigation, and the of NDC attainment is beyond business baseline gets lower over time. likely lower than historical as usual. and current emissions. Other remark(s) N.A. May provide incentives for Static factor would not early movers, in case of a provide incentives for early trend toward decreasing action, but could provide baseline emissions. simplicity and predictability. ARTICLE 6 APPROACH SERIES 10 5. Conclusions The baselines that will be defined for Article 6.2 actions will need to go beyond CDM baselines, since most CDM baseline methodologies do not materialize the ratcheting-up of ambition, and they may pose a risk for over-selling by focusing on historical practices. Nevertheless, Article 6.2 may learn from the portfolio of CDM methodologies that has varied approaches to different country and sector circumstances. As in CDM, under Article 6.2, it is unlikely that “one size fits all”. Further, some existing CDM methodologies and tools could provide the structure for setting Article 6.2 baseline emission factors with some adaptations or adjustments. As a specific example, ACM0002 and AMS-I.D and the Grid Tool could be adapted to set baseline emission factors for Article 6.2 actions under NDCs of different characteristics. The concept of a ladder of approaches to baseline setting could be applied. At the beginning of Article 6.2 implementation, it may be appropriate to apply simpler approaches based on existing CDM concepts while there is development of capacity and resource constraints are overcome. Whereas moving forward, a transition toward more ambitious or more complex approaches could be implemented over time. As a final consideration, the following areas for exploration were identified during the development of this approach paper: • Coherency of mitigation outcomes: how might coherence between baselines and MOs be achieved across countries and across different mechanisms under Article 6? • Links to the voluntary market: how would activities under voluntary markets impact baseline setting under Article 6.2? 11 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES ANNEX 1 Example: ACM0002: Grid-connected electricity generation from renewable sources Methodology Explanation Example case Adherence under Paris Element Agreement or changes anticipated Title Indicative for ACM0002: Grid-connected No change anticipated. project types electricity generation from renewable sources Applicability Pre-conditions to be Grid connected RE (excluding No change anticipated. met for application biomass) projects including to a project greenfield, capacity addition and rehabilitation or retrofit or replacement Normative Reference to other tools E.g., TOOL01 for Changes to the tools and references additionality; TOOL07 for reference to other tools grid emission factor might be needed. Baseline Selected approach 48(a): actual or historical Not well aligned with potential approach from paragraph 48 of emissions; or 48(b): baseline approach options the CDM modalities economically attractive under the Paris Agreement (PA). and procedures course of action Different criteria are required to define PA baseline. Baseline methodology Project Spatial boundaries, All power plants connected No change anticipated. boundary sources of emissions to the grid and associated and GHGs included CO2 emissions Baseline Likely scenario to prevail Emissions from grid Changes are needed to the scenario in absence of project connected plants, emission tool to define a PA appropriate activity impacting intensity factor computed emission factor aligned with the emissions, linked to based on TOOL07 for PA baseline approach and NDC baseline approach grid emission factor accounting among other aspects that need to be incorporated. Additionality Basis to indicate that Reference to other tools: The concept of additionality may the project is not TOOL01 for additionality; be replaced by environmental business-as-usual TOOL32 for positive lists integrity of mitigation outcomes (MO), or alternative methods of demonstrating additionality may be developed. Baseline Emissions associated Based on net electricity The calculation of the grid emissions with the baseline generation by the emission factor based on the project activity and the tool might need revision to align grid emission factor with eligible baseline scenarios. Project Emissions associated Emissions in case of hydro No change anticipated. emissions with the project and geothermal projects ARTICLE 6 APPROACH SERIES 12 Methodology Explanation Example case Adherence under Paris Element Agreement or changes anticipated Leakage Emissions associated No leakage No change anticipated. outside the project boundary Emission Baseline minus project No change anticipated. reductions minus leakage Monitoring methodology Ex-ante Parameters fixed Linked to baseline approach parameters for EF determination. Ex-post Parameters to be Net electricity generation Linked to baseline approach parameters monitored for EF determination. Example case: ACM0001: Flaring or Use of Landfill Gas Methodology Explanation Example case Adherence under Element Paris Agreement or changes anticipated Title Indicative for ACM0001: Flaring or No change anticipated. project types Use of Landfill Gas Applicability Pre-conditions to be Capture of LFG and No change anticipated. met for application destruction by flaring or to a project by energy generation Normative Reference to other tools E.g., TOOL01 for additionality; Changes to the tools and references TOOL08 for mass flow reference to other tools in a GHG stream might be needed. Baseline Selected approach 48(a): actual or historical Not well aligned with potential approach from paragraph 48 of emissions baseline approach options the CDM modalities under PA. Different criteria and procedures required to define PA baseline. Baseline methodology Project Spatial boundaries, Location where LFG is captured No change anticipated. boundary sources of emissions and flared or used and and GHGs included associated CH4 emissions. Baseline Likely scenario to prevail Must be a history of If this sector or this type of scenario in absence of project atmospheric release of action is included in the NDC, activity impacting LFG, except to comply then NDC impacts would emissions, linked to with regulation; continued need to be considered. If baseline approach release of LFG at the rate not, could be applied as is. permitted by regulation. If energy is generated, then NDC impacts on the baseline for electricity or heat would also need to be considered, or excluded from the project and only LFG destruction needs to be considered. 13 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES Methodology Explanation Example case Adherence under Element Paris Agreement or changes anticipated Additionality Basis to indicate that Reference to other tools: The concept of additionality the project is not TOOL32 for positive lists; may be replaced by business as usual TOOL02 combined tool environmental integrity of the MO, or alternative methods of demonstrating additionality may be developed. Baseline Emissions associated Based on measured methane Similar, with adjustment to emissions with the baseline destruction, adjusted to reflect comply both with regulation regulation requirements. requirements and NDC/other baseline scenario aspects. Project Emissions related to energy use No change anticipated. emissions for operation of the project Leakage Emissions associated No leakage No change anticipated. outside the project boundary Emission Baseline minus project No change anticipated. reductions minus leakage Monitoring methodology Ex-ante Parameters fixed Expected LFG flow and No change anticipated. parameters methane content Ex-post Parameters to be LFG flow and methane content No change anticipated. parameters monitored Example case: AMS-III.BB Electrification of communities through grid extension or construction of new mini-grids Methodology Explanation Example case Adherence under Element Paris Agreement or changes anticipated Title Indicative for AMS-III.BB Electrification of No change anticipated. project types communities through grid extension or construction of new mini-grids Applicability Pre-conditions to be Community without grid No change anticipated. met for application connection, powered by stand- to a project alone power generators and/or using fuel-based lighting system Normative Reference to other tools E.g., TOOL07 for grid Changes to the tools and references emission factor reference to other tools might be needed. Baseline Selected approach Considers tiers of default energy Partially aligned with potential approach from paragraph 48 of use and emission factors, benchmark approaches. the CDM modalities closest to 48(b): economically and procedures attractive course of action ARTICLE 6 APPROACH SERIES 14 Methodology Explanation Example case Adherence under Element Paris Agreement or changes anticipated Baseline methodology Project Spatial boundaries, Location of end users and No change anticipated. boundary sources of emissions all power plants connected and GHGs included to the grid and associated CO2 emissions. Baseline Likely scenario to prevail Community of end users were If this sector or this type scenario in absence of project >75% households and was not of action is included in the activity impacting grid connected. Assumption that NDC, then NDC impact emissions, linked to the end users used stand-alone on the baseline would baseline approach power generators and/or using need to be considered. fuel-based lighting system. If it is not part of the NDC, it may still be necessary to consider whether the projected emissions in the reference scenario of the country are aligned with suppressed demand assumptions, i.e. assuming increasing emissions from end-users such as those in the project. Additionality Basis to indicate that General SSC guidelines The concept of additionality the project is not for additionality may be replaced by the business as usual environmental integrity of the MO, or alternative methods of demonstrating additionality may be developed. Baseline Emissions associated Based on measured grid Adjustment may be needed to emissions with the baseline electricity use and benchmark- align with baseline scenario. type baseline emission factors Project Emissions associated Emissions related to grid No change anticipated. emissions with the project electricity use by the project Leakage Emissions associated From deforestation of No change anticipated. outside the project transmission line construction boundary Emission No change anticipated No change anticipated. reductions Monitoring methodology Ex-ante Parameters fixed Estimates of ex-post parameters Adjustment may be needed. parameters Ex-post Parameters to be Electricity use and electricity No change anticipated. parameters monitored emission factor 15 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES ANNEX 2 Annex: Assessment and proposed recommendations for changes in ‘TOOL07: tool to calculate the emission factor for an electricity system’ under Article 6 NDC achievement, ambition raising and ensuring environmental integrity call for changes in the current tool. Following a comprehensive review of the existing tool with regard to the adherence under the Paris Agreement Article 6, the following changes are proposed. Adherence under Paris Agreement Tool Element  Existing text and proposed changes Title  Tool to calculate the emission Aligned, no change required. factor for an electricity system Introduction 1 This methodological tool determines The tool can be expanded to cover other GHGs the CO2 emission factor for too, such as CH4 and N2O. However, CH4 and the displacement of electricity N2O emissions factors for electricity generation are generated by power plants in an less than 0.3% and 0.4% when compared to CO2 electricity system, by calculating emissions, therefore it could still be excluded. the “combined margin” emission factor (CM) of the electricity system. This methodological tool determines the CO2 emission factor, or no change. Although, the reference to the combined margin may be removed, there could be alternate approaches too. Scope 2 The CM is the result of a weighted Literature research has indicated that the average grid average of two emission factors emission factor should not be used for calculating pertaining to the electricity system: abatement by intervention. A marginal emission the “operating margin” (OM) and the factor is more appropriate in these circumstances, “build margin” (BM). The operating because it is designed to take into account the margin is the emission factor that change in electricity generation at the margins. refers to the group of existing power plants whose current electricity The average grid emission factors published by IEA generation would be affected have generally been found to be much lower when by the proposed CDM project compared with marginal grid emission factors quoted activity. The build margin is the in registered CDM project(s) from the respective emission factor that refers to the countries. As a result, the emissions reduction group of prospective power plants estimates from electricity saving or renewable whose construction and future energy power generation projects are bound to operation would be affected by the be underestimated with the average grid EFs. proposed CDM project activity. Further, the reference emission factors in case of Joint Crediting Mechanism (JCM) are derived corresponding to the respective grid mix in a conservative and simple manner to secure net emission reductions. Such a calculation takes into consideration the most advanced technologies being used in the currently operational power plants in the country. ARTICLE 6 APPROACH SERIES 16 Adherence under Paris Agreement Tool Element  Existing text and proposed changes 2 cont. Therefore, apart from reference to the combined margin approach, the average and reference emission factors may also be included or embedded in the CM approach. For example, use of the published emission factor derived by International Energy Agency (IEA) is cited in the Global Carbon Council (GCC) methodology GCCM001; Use of reference emission factors in case of Joint Crediting Mechanism (JCM) methodologies for grid connected RE projects. Applicability  3 This tool may be applied to estimate As per the above, may also include average and the OM, BM and/or CM when reference emission factors too, or embed in the calculating baseline emissions for definition of CM. a project activity that substitutes grid electricity, that is, where a project activity supplies electricity to a grid or results in savings of electricity that would have been provided by the grid (e.g. demand- side energy efficiency projects). 5 In case of CDM projects the tool For post-2020 regime, this paragraph is not is not applicable if the project relevant. This clause can be removed. electricity system is located partially or totally in an Annex I country. Normative references  8 This tool refers to the latest approved The default values prescribed in TOOL09 may need versions of the TOOL09: Determining to be revisited, following the example of the JCM the baseline efficiency of thermal or approach with the reference emission factor. electric energy generation systems”. This tool is also referred to in the Changes to appendix with default efficiency TOOL05 "Baseline, project and/or factors in TOOL09 would be needed. leakage emissions from electricity consumption and monitoring of electricity generation ...” Definitions  No change required. Parameters 11 Table 1 Parameters The parameters may be expanded with the average (EFgrid,Avg,y) and reference emission factor (EFgrid,Ref,y). 12 Table 2 Data requirements to The table needs to be amended for simplification determine OM and BM and inclusion of other approaches too. Baseline methodology procedure  14 Project participants shall apply Either the options can be included prior to the steps the following six steps: or certain steps can become optional and additional steps can be added. 17 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES Adherence under Paris Agreement Tool Element  Existing text and proposed changes Step 1: Identify the relevant electricity systems 16 The project participants shall identify The following text can be removed ‘If a connected any connected electricity systems. electricity system is located partially or totally in Annex If a connected electricity system is I countries, then the emission factor of that connected located partially or totally in Annex electricity system should be considered zero’. I countries, then the emission factor of that connected electricity system should be considered zero. 26 For imports from connected This paragraph can be removed following changes to electricity systems located in paragraph 16. Annex I country(ies), the emission factor is 0 tons CO2 per MWh. Step 3: Select a method to determine the operating margin (OM) 42 Ex ante option: if the ex ante The ex-ante and ex-post options would need to be option is chosen, the emission edited. Instead of mentioning the determination of the factor is determined once at factor as an option once, it would necessitate ongoing the validation stage, thus no monitoring and recalibration. monitoring and recalculation of the emissions factor during the Further, for ex-ante estimation, top-down defined crediting period is required. emission factors for the grid based on modelling may be included. Step 4: Calculate the operating margin emission factor according to the selected method 46 The simple OM emission factor The simple OM can be replaced with reference is calculated as the generation- emission factor. weighted average CO2 emissions per unit net electricity generation (t CO2/MWh) of all generating power plants serving the system, not including low-cost/ must-run power plants/units 47 The simple OM may be calculated The options are not necessary with the reference OM by one of the following two options: being calculated with respective share of type of fossil fuel power plants. Option A: Based on the net electricity generation Instead of ‘unit’ it would be ‘type’ of power plant. and a CO2 emission factor of each power unit; or 47 cont. Option B: Based on the total net Also, as part of simplification, options A1 and option B electricity generation of all power can be removed, as plant specific generation may not plants serving the system and the be needed. fuel types and total fuel consumption of the project electricity system. 48 Option A: Calculation based on Instead of average efficiency, consider the most average efficiency and electricity advanced technologies being used in currently generation of each plant operational power plants in the country/region. ARTICLE 6 APPROACH SERIES 18 Adherence under Paris Agreement Tool Element  Existing text and proposed changes 49 The emission factor of each The emission factor of each power plant type m power unit m should be should be determined as … determined as follows: Further, option A1 can be removed. 50 Where several fuel types are Option A3 can be removed for simplification and used in the power unit, use the to avoid reliance on historic efficiency data. fuel type with the lowest CO2 emission factor for EFCO2,m,i,y. Option A3 – If for a power unit m only data on electricity generation is available, an emission factor of 0 t CO2/MWh can be assumed as a simple and conservative approach. 54 6.4.1.2. Option B: Calculation based This option can be removed for simplification and on total fuel consumption and to avoid reliance historic fuel consumption data. electricity generation of the system 55 For this approach (simple OM) to This paragraph can also be removed, as this has been calculate the operating margin, the covered earlier. subscript m refers to the power plants/units delivering electricity to the grid, not including low-cost/ must-run power plants/units. 67 The CO2 emission factor of Reference to options to be removed following earlier the grid power units n (EFEL,n,y) changes. should be determined as per the guidance for the simple OM, using the Options A1, A2 or A3 71 When following the guidance Following earlier point, since option B is being of calculation of the simple removed, this paragraph should also be removed. OM, Option B should only be used if the necessary data for Option A is not available. Step 5: Calculate the build margin (BM) emission factor 72 In terms of vintage of data, project The option 1 fixing the BM ex-ante should be removed. participants can choose between one of the following two options: 75 …excluding power units registered This clause can be removed. as CDM project activities… 76 The following diagram summarizes The flow diagram to be edited as per above point. the procedure above: 78 The CO2 emission factor ... using Reference to options should be removed the Options A1, A2 or A3 following earlier changes. 19 DEVELOPING AN ARTICLE 6 STRATEGY FOR HOST COUNTRIES Adherence under Paris Agreement Tool Element  Existing text and proposed changes 79 If the power units included in the This paragraph can be removed as option A2 is build margin … only Option A2 the only option after the above changes have been from guidance in Step 4 … made and the efficiency also corresponds to the most advanced technologies being used in currently operational power plants in the country/region. Monitoring methodology  103 Some parameters listed below Some parameters listed below under “data under “data and parameters” either and parameters” need to be monitored need to be monitored continuously continuously during the crediting period. during the crediting period or need to be calculated only once for the crediting period, depending on the data vintage chosen …