Clean Development Mechanism

The role of Designated Operational Entities in the Clean Development Mechanism has come under fire over the past 12 months. ROBERT DORNAU sets the record straight.

The performance of Designated Operational Entities (DOEs) has increasingly been in the spotlight, amid accusations from some parties that they’ve been insufficiently rigorous in clearing Clean Development Mechanism (CDM) projects for registration. Among the criticisms, claims have been made that DOEs, the private sector firms project developers must employ to validate their projects, are not effectively filtering out projects that are not additional – ie, do not lead to real emissions reductions. This analysis is often based on publicly available figures, derived from databases such as the UNEP Risø CDM Pipeline.

But an analysis using confidential data available to DOEs paints a different picture. These numbers show that DOEs have, in fact, been more rigorous in rejecting projects or requesting substantive revisions than the headline figures might suggest. The analysis shows that more than 200 projects submitted before January 2007 and still listed as ‘‘at validation’’ in the CDM pipeline have effectively been rejected by DOEs or are very unlikely to ever be registered. This compares to 46 projects rejected by the CDM Executive Board in the comparable period.

The analysis is based on data provided by a group of DOEs (BV Cert, DNV, SGS,TUV Süd, and TUV Nord). It includes all projects submitted to those DOEs and published for public stakeholder consultation before January 2007. This cut-off date was chosen under the assumption that projects submitted before that date that are still listed as ‘at validation’ have either been rejected by DOEs already, or have major Corrective Action Requests (CARs), raised by DOEs, outstanding that are unlikely to be closed.

In total, 1,447 projects were made public before December 2007, and 1,346 (93%) of those were submitted for validation to the above DOEs. The further analysis only focuses on those 1,346 projects. According to the April 2008 CDM Pipeline, 404 of those projects are still ‘at validation’ but, when the DOEs consolidated their databases, they found only 341 projects that match the ‘at validation’ status in the UNEP Risø database. This difference can be attributed to, for example, projects being resubmitted with a different project name and therefore listed twice.

Of the 341 projects, 92 are confirmed as still being reasonably categorised as under validation by DOEs, and the other projects can be categorised as follows:

• 104 projects were denied a positive validation opinion by DOEs This category includes projects where the DOE issued a negative final validation opinion to the client as well as projects for which the validation contract is terminated by the project developer/client because the DOE indicated that the final validation opinion would be negative. The issuance of a negative final validation opinion does not happen in the latter case, as the contract is terminated by the client at a potentially early stage and the DOE would not be paid for the issuance of such an opinion.
  
  In percentage points, this means that 7.7% of projects submitted for validation before 2007 were rejected by DOEs. In terms of projects still listed as ‘at validation’ the share is over 30%.
  
  
• 117 projects with open CARs are unlikely to get to registration This category includes projects with CARs open on issues regarding additionality and applicability of methodology. In total, 89 projectsare pending the closure of a CAR on additionality. This means 6.6% of projects submitted before 2007, or 26.1% of projects still listed as ‘at validation’. A further 28 projects have issues with the methodology applicability (2% of all projects, 8.2% of projects ‘at validation’).
  
  
• 28 projects still missing a Letter of Approval (LoA) This could be the LoA from the host country or an LoA required for another project proponent listed in the project design document (PDD). No issuance of an LoA by a host country could mean that the project does not contribute to sustainable development in the host country. However, there could be a number of other reasons and experience has shown that issuance of an LoA can be delayed by several years. Hence, DOEs do not classify all projects in this category as unlikely to ever be registered.

Many projects requesting validation services from DOEs never start this process. The validation process officially starts with the uploading of the PDD for public stakeholder consultation. But before this, the DOE and the project developer already interact in the so-called ‘contract review’ stage. In order to prepare a proposal, the DOE usually asks a number of questions, including questions regarding the applied methodology and the additionality of the project. The project developer might also ask for the DOE to undertake a pre-validation based on a draft PDD.

The result of the contract review and also the pre-validation can be that the client does not enter into a full validation service agreement with a DOE. Unfortunately, this cannot be substantiated by concrete numbers. DOEs generally do not know whether the client did not order full validation services because another DOE made a better offer or because of the client realizing through the posed questions that the project has little chance of becoming a successful CDM project.

DOEs have come under particular criticism for their handling of additionality assessments. However, there are only a limited number of projects for which additionality is very clear cut. Those are projects that require investment to reduce/destroy emissions, without having any other financial benefit to the project owner. This is limited to industrial gas and methaneflaring projects, without the production of heat or energy. In most other cases, additionality comes in shades of grey. Opinions differ on which shade of grey is still black and which is white. As a result, most of the rejections by the CDM Board are grounded on a different interpretation of the additionality arguments provided by the project developer and validated by the DOE.

Executive Board guidance on additionality and the required documentation and validation of evidence also leave room for interpretation. However, DOEs are confident that a clear understanding of DOE capabilities and Board requirements will be reached as a result of the development of a validation and verification manual. As the above analysis shows, DOEs will reject projects or raise tough CARs if justified. The more precise the guidance by the Board, the more effective the DOEs can be in raising corrective actions and filtering out projects that do not belong in the CDM.

This story was first published in www.carbon-financeonline.com.