6.3.2.3 Baselines

Credible project-based mechanisms under the Kyoto Protocol require the achieved net emission reduction (sink enhancement) to be determined.⁶⁹ The reduction is defined as the difference between what emissions (sequestration) would have been in the absence of the measure, the baseline, and actual emissions (sequestration). Thus, the baseline is an estimate of a situation that will never exist (Bohm, 1994; Jepma et al., 1998; Kerr, 1998; Begg et al., 1999).

Since the true baseline can never be observed, a baseline from which emission reductions are calculated may be estimated through reference to emissions from similar activities and technologies in the same country or other countries, or to actual emissions prior to project implementation.⁷⁰ Although this judgement is exercised through review by qualified, independent experts, possibly by stakeholders (such as environmental organizations), and by an entity with the final decision authority, the baseline will be an approximation of the counterfactual.⁷¹ One way to reduce baseline uncertainty may be to limit the crediting period or to issue credits for only a fraction of the estimated emission reductions. However, this reduces the investors’ interest in financing the projects.

Baseline determination requires a trade-off between the transaction costs of certification and the environmental costs of adverse selection, adjustments for increased emissions at other locations caused by the project (leakage), moral hazard, and changes over time in contextual economic, technological, and institutional conditions. Several options for baseline methodologies to try to deal with these trade-offs–including sectoral benchmarks, dynamic baselines, and selective eligibility of project types–are discussed in the literature (Chomitz, 1998; Hargrave et al., 1998; Jepma, 1999; Michaelowa and Dutschke, 1999a; NEDO, 2000). In addition, numerous IEA/OECD and other studies have been published on standardization of baselines for specific sectors.⁷²

Also several options for baseline determination have been proposed in the literature (Chomitz, 1998; Hargrave et al., 1998; Jepma, 1999; Michaelowa and Dutschke, 1999a; NEDO, 2000). Several of these proposals try to deal with the issues of adjustment for increased emissions at other locations (leakage) and changes to the baseline over time.

Regardless of the method used to develop the project baseline, the partners involved in the project, excluding the JI host government, have an incentive to propose a baseline that yields as large a reduction as possible (Bohm, 1994; Wirl et al., 1998).⁷³ Baseline inflation would increase the number of credits created and raise the return to investors and/or the host firm or country. To minimize the risk of baseline inflation, an independent body with the authority to review certifications could be identified or created. In the case of the CDM the entity with the authority to make the final decision will be the Operating Entity, in accordance with the executive guidelines, or the Executive Board, or the CoP/MoP (Meeting of the Parties). In the case of JI the entity will be the host government.⁷⁴ The process adopted by the independent body would also determine the transaction costs involved in defining baselines.

6.3.2.4 Experience with Activities Implemented Jointly

Decision 1/CP5 of CoP1 in 1995 established a pilot phase for emissions reduction projects called Activities Implemented Jointly (AIJ). AIJ projects cannot create credits that can be used by Parties to meet commitments under the Convention or the Kyoto Protocol. This is a crucial difference between AIJ and JI or CDM projects. Table 6.2 summarizes the characteristics of AIJ projects.

Dixon (1999) provides a comprehensive review of the experience with AIJ projects and the implications for JI and CDM projects, illustrating the valuable experiences gained in project baseline development and monitoring. However, several authors argue that AIJ projects may not be representative of future JI and CDM projects (JIQ, 1998; Trexler, 1998; Woerdman and van der Gaast, 1999). Others suggest that AIJ projects provide limited guidance on how to establish baselines for emissions reduction or sequestration projects (Ellis, 1999; Lile et al., 1999).

Table 6.2: Characteristics of activities implemented jointly projects
Number of projects	94	Annex I countries: 68; non-Annex I countries: 26
Investors		Public sector: 61; private firms: 32
Project types	Renewable energy: 44%; energy efficiency: 38%; forestry or agriculture: 15%
Project life (years)	16.5a	Range: 1 year to 60 years
Average emission reduction (tCO2eq)	1,658,320	Range: 13 x 106 to 57,467,271 (tCO2eq)
Average investment	US$6,298,065	Range: US$73,000 to US$130,000,000
Total investment	US$558,000,000b
Average cost of emission reductions	Annex I: US$97/tCO2eq; excluding “expensive” projects: US$26/tCO2eq
	Other: US$158/tCO2eq; excluding “expensive” projects: US$9/tCO2eq
Source: Woerdman and van der Gaast, 1999. a Average lifetime of projects considered. b Total investment in all projects considered.

IPCC Homepage