CDM Project Development

CDM project cycle

Carrying out a CDM project and receiving final registration by the CDM Executive Board requires multiple steps. These steps are regarded as the CDM project cycle, and are put in place in order to to safeguard the actual climate benefits of CDM project activities.

The project cycle can be seen in the figure below:

Source: Adapted from "Using the CDM into energy planning – A case study from South Africa", James-Smith, E

Project Design

This step involves developing a Project Design Document (PDD), which is a standard format describing how the activity intends to fulfil the pre-requisites for registration as a CDM project. The PDD consists of a general description of the project, its proposed baseline methodology, a timeline and crediting period, a monitoring methodology, calculation of GHG emissions by source and stakeholder comments. The host country Designated National Authority (DNA) must issue statements on the PDD indicating that the government of the host country participates voluntarily in the proposed activity and that the project assists the host country in achieving sustainable development.

Validation and Registration

Validation is a process involving an independent evaluation of the project activity by an external auditor known as a Designated Operational Entity (DOE), which is hired by the project participants (a list of DOEs can be downloaded from the UNFCCC website). The DOE reviews the PDD in order to determine whether the project meets CDM requirements.

Once a project activity has been validated by a DOE a validation report is forwarded to the Executive Board (EB) for registration as a CDM project. The registration of a project will be final within eight weeks after the date of receipt by the EB unless at least three members of the EB request a review of the project activity.

Monitoring

Once the project is operational the emissions that occur from the activity must be monitored. This is done according to the monitoring plan submitted and approved in the PDD, which indicates the method used for measuring emissions from the project and how data relevant for these calculations will be collected and archived. The information on emission reductions must be included in a monitoring report estimating the amount of CERs generated and submitted to a DOE for verification.

Verification and Certification

Verification is the independent review of the monitoring report submitted by the project participants. A DOE different to that involved in the validation process carries out verification (a list of DOEs can be downloaded from the UNFCCC website). The DOE must ensure that the CERs have been generated according to the guidelines and conditions agreed upon during the validation of the project. A verification report is then produced.

The same DOE that verified the project also certifies the CERs generated by the activity.

Certification is the written assurance from the DOE that the project achieved the stated level of emission reductions and that these reductions were real, measurable and additional. The certification report constitutes a request to the EB for issuance of CERs. Unless a project participant or at least three members of the EB request a review within fifteen days the EB will instruct the CDM registry to issue the CERs.

Legal documents for CDM project development

In order to comply with the modalities and procedures for CDM project validation and registration by the CDM Executive Board, the project developer must ensure completion of the right documentation.

Project Idea Note

The first step is to receive national approval by the host country DNA. Some countries might require the elaboration of a Project Idea Note (PIN), which is a document aiming at describing the initial project idea, including anticipated emission reduction measures and investment costs related to the project activity. This document is not a legally required in order for a project activity to be eligible under the UN, thus it is recommended that the project developer study the specific requirements for CDM project development as defined by each host country.

Project Design Document

The Project Design Document (PDD) creates the basis for the validation and registration process under the UN. The PDD contains all relevant information regarding the project activity, including a thorough description of the proposed emission reduction activity, a justification of the additionality requirement. In addition the PDD should contain a monitoring plan to explain how the emission reductions will be monitored.

Emission Reduction Purchase Agreement

In order for sellers and buyers of carbon credits to enter into a trade agreement the Emission Reduction Purchase Agreement (ERPA) is commonly used. The ERPA sets forth the terms and conditions of credit delivery and payment between the seller and the buyer.

This document takes various forms but the main objective of the agreement is to cover the legal aspects of credit ownership, the terms of payment and delivery and the management of risks inherent to the transaction.

Key institutions under the CDM

Conference of the Parties/Meeting of the Parties (COP/MOP)

The COP/MOP is the overall authority of the intergovernmental system for dealing with climate change under the UN and thus also the superior body of the handling of the CDM. The COP/MOP decides and provides guidance of relevance to the CDM, which includes taking decisions on basis of recommendations and suggestions provided by the Executive Board as well as provides guidance to further activities under the CDM

Executive Board (EB)

The EB is the core institution of the CDM responsible for supervising the CDM process under the authority of the COP/MOP. The EB plays a vital role in the CDM and is responsible for maintaining the integrity of the CDM and for exercising regulatory functions by contributing to the development of guidelines and procedures for CDM project development as well as provide guidance on how certain regulations should be interpreted. In addition to this the EB has the responsibility of registering CDM project proposals as well as issuing CERs.

Designated National Authority (DNA)

All parties wanting to participate in the CDM must establish a Designated National Authority (DNA) in order to approve CDM project activities and assist providing guidelines and procedures for CDM activities in accordance with national regulation and priorities. In non-Annex 1 countries the DNA is the key entity involved with CDM and is the institution responsible for ensuring that the host country maintains control over the CDM project activities undertaken in its country. In this regard the DNA specifically has the responsibility of ensuring that CDM activities meet the sustainable development objectives determined by the host country.

Designated Operational Entity (DOE)

The DOE is independent private companies or consultants accredited by the EB to function as external controllers of the CDM project activities. This involves validating that all procedures and documentation required for CDM project activities comply with the rules and modalities established under the mechanism. The main task of the DOE in this regard is to confirm that a given project activity is additional.

Eligible CDM project types

In order to comply with the overall framework for CDM project development the project type applied must be eligible under the framework of the Kyoto Protocol. In general all projects that reduces greenhouse gas emissions, while at the same time complying with the host country sustainable development criteria and the additionality requirements as stated under the Kyoto Protocol, are eligible as CDM.

In order to safeguard the actual climate benefits of CDM projects the crucial feature is to prove that CDM projects are additional. This implies that it should be possible to demonstrate that the proposed project activity is not the business as usual scenario and that the emission reductions are additional to any reductions that would have occurred in the absence of the project activity. This can be done by demonstrating that the CDM can help overcome some existing barriers for implementation of a given emission reduction activity.

In terms of energy related CDM activities some examples are listed below:

End-use energy efficiency improvement
Supply-side energy efficiency improvement
Renewable energy
Fuel switching
Industrial processes
Solvent and other product use
Waste management

Small-Scale projects

Small scale CDM projects are projects that applies to one of the following three definitions:

Type (i) project activities: renewable energy project activities with a maximum output capacity equivalent to up to 15 megawatts.
Type (ii) project activities: energy efficiency improvement project activities, which reduce energy consumption, on the supply and/or demand side, by up to the equivalent of 15 gigawatt hours per year.
Type (iii) project activities: other project activities that both reduce anthropogenic emissions by sources and directly emit less than 15 kilotonnes of carbon dioxide equivalent annually.

In order to reduce transaction costs for developing small-scale projects simplified rules and modalities are developed for this purpose.

Further guidelines on how to carry out a small-scale project

CDM project development costs

Several costs have to be made to register a project as a CDM project and before the tradable CERs can actually be generated. The transaction costs related to the development of CDM projects comprises the costs related to the validation of a CDM project activity, which requires use of external experts (the so called Designated Operational Entities – DOE) as well as payment of registration fees to the Executive Board under the UNFCCC and fees for receiving national approval by the host countries, if this is required. These costs can vary from 40,000 US$ to as high as 150,000 US$ per project.

Prices do not reflect the sizes of the project thus large projects are often preferred in order to comparatively reduce transaction costs. In order to ease the transaction costs for smaller projects modalities for a category of small-scale projects are defined under the CDM framework, allowing these projects to utilize simplified rules and procedures for project development.

Indicative prices related to the registration of CDM projects by the EB
Average tonne of carbon dioxide equivalent reductions per year over the crediting period (estimated/approved)	USD
<= 15,000	5,000
>15,000 and <=50,000	10,000
>50,000 and <=100,000	15,000
>100,000 and <=200,000	20,000
>200,000	30,000
Source: compiled data from the UNFCCC website

Contact the DOEs for more information on specific costs related to the validation and verification of CDM project activities. A list of DOEs can be downloaded from the UNFCCC website.

For information on additional costs related to specific national procedures for CDM project approval in the host countries these information can be obtained by contacting the responsible entity for CDM project approval in each host country.