The Clean Development Mechanism (CDM) Project Cycle

The Clean Development Mechanism of the Kyoto Protocol defines a series of steps necessary to develop certified emissions reductions (CERs):

1. Project Design
2. Project Validation
3. Host Country Approval
4. Registration with the CDM Executive Board
5. Implementation and Monitoring
6. Verification/Certification and Issuance of CERs
7. Sale of CERs

The overall timeframe for this process depends on certain key steps over which we have no direct control, in particular the host country approval and the approval by the CDM Executive Board (where each cycle of review will typically take at least 30 days), but can reasonably be expected to occur within twelve to eighteen months. The process is highly bureaucratic and encumbered with a lot of jargon that has unfortunately become an integral part of the process. Each step is presented in detail below.

Project Design
The first step starts with a determination of whether the project concept would qualify as a CDM project, including screening against project criteria, estimating the magnitude of emissions reductions, and preparing a Project Design Document (PDD) to meet certain specifications. The PDD must address the following key issues:

• Establishing the "baseline" for the project, which represents the anthropogenic emissions that would occur in the absence of the proposed project activity. The current flaring of gas may be an important consideration in establishing this baseline.
• Demonstrating "additionality," which in essence is a demonstration that the proposed project is not "business as usual." While this criterion has proved to be controversial on some projects, a series of guidelines is now available for making the additionality demonstration. and there is precedent for landfill gas recovery projects of the type envisioned.
• A monitoring methodology that effectively addresses gas flow and composition.

It is also critical to provide a basis for legal ownership of the project activity, i.e. the rights to the gas generated at landfill or wastewater treatment plant.

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Project Validation
Validation is the process by which the PDD is independently evaluated by a "designated operation entity" (DOE) against the requirements of the CDM. The DOE must be a third party, separate and apart from the project developer and preparer of the PDD. Information submitted to the DOE should include comments by the local stakeholders and a summary of how due account was taken of any such comments, as well as an analysis of any environmental impact of the project's activity.

Based on its review, the DOE issues a validation report and opinion as to the adequacy of the PDD. The project developer/PDD consultant must respond to queries and comments to the satisfaction of the DOE for the final validation report to be issued.

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Host Country Approval
Upon validation of the proposed project by the DOE, the following documentation must be submitted to the designated national authority (DNA) for host country approval:

1. The validation report.
2. The PDD, including a description of how the project will contribute to sustainable development.
3. If required by local law, an approved environmental impact assessment.
4. A written commitment to deliver an annual report on the results of monitoring, certification, and issuance of CERs.

Once the DNA requirements have been satisfied, a Letter of Approval is issued for the project.

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Registration with the CDM Executive Board
Following the issuance of the Letter of Approval, a request for registration is submitted to the CDM Executive Board in the form of the validation report, including the PDD, the written approval of the DNA and an explanation of how this takes into account any comments received. The CDM Executive Board reviews the proposal and may invite public comment or ask for additional information/details before rejecting or accepting the proposal, which becomes a public document once submitted to the CDM Executive Board. Registration is a formal acceptance by the CDM Executive Board of a validated project as a CDM project activity and is the official recognition of the project feasibility to generate CER.

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Implementation and Monitoring
Once the project has been validated, detailed engineering activities can be undertaken in parallel with the CDM approval process. Typically, construction would not occur until after CDM Executive Board approval. Monitoring of emissions reductions, as specified in the PDD monitoring plan, would then be implemented. In order to calculate the emissions reductions, the emissions of the project activity have to be subtracted from the reference scenario or Baseline outlined in the PDD.

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Verification/Certification and Issuance of CERs
Verification is required by a DOE, separate and apart from the preparer of the PDD and the DOE responsible for project validation, in order to demonstrate that actual emissions reductions are consistent with the PDD. A certification report is required on an annual basis to quantify the actual emissions reductions achieved during that period. The second DOE conducts on-site inspections, reviews monitoring results, and provides a verification report to the CDM Executive Board.

The certification constitutes a request to the CDM Executive Board for issuance of CERs equal to the verified amount of reductions from the project. This issuance should be considered final 15 days after the day of receipt of the request for issuance, unless issues are raised by the CDM Executive Board or other parties involved. The requisite amount of CERs is then deposited in the registry account of the project developer.

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Sale of CERs
The process of negotiating the sale of the CERs can usually start as the PDD is being finalized. A Term Sheet spelling out the terms of the agreement is initially prepared and later used for drafting the so-called Emissions Reductions Purchase Agreement (ERPA). These agreements define the amount of CERs to be transferred, the purchase price, the time period of delivery, and other relevant conditions. ENVIRON is experienced in developing these agreements and working with the buyers in the emissions reductions marketplace, e.g., World Bank’s Prototype Carbon Fund, tenders by national governments, brokers, and private sector buyers.

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