Ministry of Housing, Spatial Planning and the Environment
Directorate for International Environmental Affairs
Clean Development Mechanism Division
12 September 2001
Implementation of the Clean Development Mechanism
by The Netherlands
Disclaimer
This document describes the Netherlands most recent views regarding procedures and underlying principles on implementation of CDM by the Netherlands. It thereby substitutes all previous documents on the subject. Since the knowledge on CDM and its procedures are still evolving this document should be considered as a living document, subject to future changes. No legal rights can be adopted from this document.
1. Introduction
July 2001 offered a pleasant surprise for mankind, despite previous pessimistic expectations: a political agreement was reached at the resumed 6th Conference of the Parties (CoP6+) under the Kyoto Protocol. Although several details still have to be elaborated and concluded in November 2001 at CoP7 in Marrakesh, by giving guidance to many procedures the CoP6+ agreement - also called the Bonn agreement - has now enabled and effective start of implementation of the Kyoto protocol.
Under the Kyoto Protocol the Dutch obligation is to reduce its GHG (green house gases) emissions by 6%, compared to the reference year 1990. Already in 1999 the Dutch government decided – in line with European policy – to score 50% of this obligation on a national level and the remaining 50% abroad by application of the Flexible Mechanisms CDM (Clean Development Mechanism), JI (Joint Implementation) and IET (International Emissions Trading).
The major part of the reductions under the Flexible Mechanisms is expected to be covered by CDM, being the responsibility of the Ministry of Housing, Spatial Planning and the Environment (VROM, abbreviated in Dutch).
JI, being the responsibility of the Ministry of Economic Affairs, is however also expected to play a significant role. In June 2001 the first JI contracts concerning projects in several Eastern European countries were established and signed.
However this note does not touch on JI nor does it address IET.
CDM and JI together are expected to cover in total 125 Megatonnes of CO2, representing the 50% gap to be bridged abroad in the budget period 2008-2012.
In 2000 the Dutch government assigned considerable financial budgets to VROM and ordered the start of implementation of CDM. CDM aims at establishing cost effective reductions of GHG emissions abroad while contributing to sustainable development of the country involved. The achieved GHG reductions, called CERs (Certified Emission Reductions) are bought by the donor country (i.c. the Netherlands). As far as CDM is concerned abroad is defined as (in most cases non-industrialized) countries, having no specific GHG reduction target under the Kyoto Protocol, also known as non-annex 1 countries.
Although CoP6+ has generated much clarity, not all questions on CDM have been answered yet and even when at CoP7 the EB (Executive Board) has been appointed it will take some more time before all provisions and guidance documents will be available and accepted by all parties. This implies that on the short term (1-2 year?) several uncertainties will persist. While the Dutch government intends to continue on implementation of CDM, in case of such uncertainties the tendency will be towards conservative estimates (“stay on the safe side”).
As long as official institutions for guiding and deciding on CDM projects do not exist or have not yet provided unambiguous guidance, VROM will deploy its own methodologies and procedures. It is obvious that these will fully follow the procedural steps as described in the Bonn agreement or - in case of uncertainties - be at least fully in line with its objectives. Through this approach the Dutch government intends making a quick start of implementation of the CDM while securing to the maximal possible extent that all early CDM contracts are eligible for approval and transfer of official CERs by the EB afterwards.
For the establishment of CDM projects the rules of the Bonn agreement prevail. However also VROM applies several key elements for CDM implementation, being: legitimacy and efficiency, tested against i.e. cost effectiveness, sustainability, guarantee on delivery and good governance. This document also describes VROMs position towards these elements.
Wherever this document mentions GHG, CO2-eq or CERs, both CO2 and the other 5 non-CO2 greenhouse gases as mentioned in the Kyoto Protocol are considered to be included.
Countries in which CDM projects are established are referred to as host countries.
Companies and other initiators of CDM projects (the sellers of CERs) are referred to as project participants.
2. Organization and assignment of budgets
On 1 April 2001 the CDM division was established within the ministry of VROM as a separate division of the Directorate of International Environmental Affairs. UNFCCC negotiations are the primary responsibility of the Climate Change division of the directorate of Climate Change and Industry. Therefore the two divisions cooperate closely.
Considerable budgets for execution of CDM and the purchase of CERs are allocated to the CDM division of VROM. Up front loading of CDM budgets into general CDM trust funds is not possible. Only commitments (and payments) related to tangible CDM projects are acceptable, whereby payment will in general be on delivery of the CERs. In exceptional cases up front payments of certain preparatory costs may be considered if proven unavoidable for the projects feasibility.
Since procurement rules are applicable, VROM itself is not entitled to go out on the market and buy CERs at random. So VROM intends to seek cooperation with several types of intermediate implementing organizations, hereafter called intermediaries. At present three separate tracks are under development and a fourth track is under consideration:
1. Through Multilateral IFIs (International Financial Institutions), e.g. the World Bank/IBRD, IFC and Regional Development Banks. Due to their position and international legal status these organizations are all expected to be able to go out on the market and negotiate and arrange the purchase of CERs on behalf of VROM.
2. Through international tendering by a Dutch government agency (Senter); the tender will be named CERUPT (Certified Emission Reduction Unit Procurement Tender). The CERUPT tender will strictly follow procedures and conditions set in advance, according to European (and WTO) procurement regulations.
3. Through private financial institutions, which on their term have to be selected through application of a procurement tender, according to European regulations.
4. Through bilateral purchase agreements between the Netherlands and a host country.
VROM intends to sign contracts with intermediaries which shall acquire CDM eligible projects, based on VROM’s guarantee to purchase the resulting CERs; the contracts will cover at least a 2 year period and if proven successful will be extended.
By setting preliminary conditions VROM intends preventing a too strong competition between the intermediaries involved. Assignment of CDM activities in differing areas or regions to differing intermediaries can also contribute to geographical equity.
In order to prevent conflicts of interest (regulations on state support and procurement) neither Dutch nor other European suppliers of technology and services will be favored. It will be up to the project participants (selling the CERs) to decide who will provide the technology and services for the project concerned.
As emphasized VROM will only commit itself to payments based on tangible projects meeting the criteria on which parties have agreed in advance; nevertheless (co)financing preparatory activities, like project related capacity building may be possible.
CDM budgets are not meant for financing more general climate change related activities like non project-related capacity building and adaptation; these projects are primary the Ministry of Foreign Affairs’ (Directorate General for International Cooperation) responsibility.
3. Procedures
VROM’s objective is maximizing the amount of CERs purchased at an acceptable level of quality and price. This objective could be served through differing types of contracts with the intermediaries. Generalizing at least two typical approaches are imaginable:
1. The detailed approach.
This approach aims at minimizing the risk of non-acceptance of CER by the EB through
- for each individual project - securing all procedures and setting quality criteria for the information collected.
It is the intermediaries task to acquire projects according to these procedures and meeting the criteria; in this approach VROM and the intermediary agree on a preferred (but not fully guaranteed)total amount of CERs generated by the intermediaries portfolio. For each individual project final delivery of the agreed amount of CERs is mainly the project participants responsibility, unless in cases of force majeure. (Due to the specific nature of a procurement tender CERUPT can only follow this detailed approach)
or:
2. The general approach.
This approach aims at securing the purchase and thus transfer of the CERs by agreeing on a specified and guaranteed total amount of CERs to be delivered through the intermediaries portfolio, thereby leaving more flexibility to the intermediary as how to achieve this goal. In this case VROM will at least prescribe guarantees safeguarding the cost effective expenditure of public money, all within the framework of the original CDM intentions, thereby specifying e.g. the maximum average price of the portfolio and the minimal quality of the CERs.
Although some of VROM’s (fundamental) conditions apply to both the “detailed” and the “general” approach, the conditions of the “general approach” are not further elaborated in this document; they have to be negotiated more in detail between VROM and the intermediary involved.
Thus the remainder of this and following chapters is based on the assumption of intermediaries applying the “detailed approach”. Nevertheless this information is also relevant for intermediaries considering a “general approach”, since many of the procedural rules are based on the Bonn agreements and will have to be applied anyhow.
Under the “detailed approach” the quality of the purchased CERs has to be assured, aiming at acceptance by the EB. Hence in assigning responsibility for the purchase of CERs to intermediaries, VROM wants to stay in control on crucial steps within the process. For a better understanding of the position and role of all parties involved the following chapters will contain information on:
- Procedural steps as foreseen in the Bonn agreement and its underlying documents, including specific go/ no-go decisions by VROM
- Minimum quality standards for the documents involved (to be elaborated in annexes)
- Minimum criteria for countries and projects to qualify as admissible to a CDM appraisal procedure
3.1 Procedural steps based on the Bonn agreement and standards for documents involved
The CDM “project cycle” as described in the CoP6+ documents has to be applied, i.e. establishment of project design documents including baselines, all validated by accredited designated operational entities (OEs), followed by registration at and thus acceptance by the Executive Board (EB).
The project cycle is completed by monitoring, verification, certification and finally registration.
At CoP6+ an agreement on all details of the text was not yet reached between parties. For the time being however, VROM considers the text describing the procedural rules as presented in annex A as leading and thus binding for its CDM activities. This text is based on the relevant paragraphs of the consolidated negotiation text on mechanisms by the President (FCCC/CP/2001/2/Add.2) and takes into account the Core elements of the Buenos Aires Plan of Action (FCCC/CP/2001/L.7). VROM advocates a prudent approach vis-à-vis CDM. In Bonn the high-level segment did not address procedural rules in an extensive manner. Text approved by the high-segment and the drafting group may be taken for granted. For the time being and only for the sake of this CDM implementation document choices have been made with regard to the remaining outstanding issues; these choices do not pre-empt the formal position of the Netherlands during the up coming negotiations at COP-7.
Starting from intermediaries being contracted by VROM to purchase CERs from eligible CDM projects, in general for each individual project a large number of consecutive procedural steps have to be followed, as described below. A distinction will be made between the project steps and the necessary agreements / legal documents to be exchanged between the parties involved.
For the project steps the following sequence can be anticipated (however emphasizing that the text in annex A is more accurate and binding):
- Project participants draw up a Project Identification Note (PIN), giving a brief description of the project, the amount of CERs expected and other relevant environmental effects and general information on the financing and sale of CERs. Based on this PIN, project participants investigate which intermediary might be interested in purchasing the CERs from the project. It is the intermediaries competence to decide whether the project matches with VROM’s preset conditions; in case of doubt the intermediary might ask VROM’s view at this stage. Minimum quality standards of a PIN are described in annex B
- After the PIN has been acknowledged by the intermediary as promising, the project participants elaborate and substantiate further on this document, which shall result in a Project Concept Note (PCN), providing a quite detailed description of the project and its environmental effects compared to the baseline, which is also included in the PCN; the PCN includes also the purchase price of the CERs, all according to the quality standards as specified in annex B
- After completion, the PCN (including the Letter of Endorsement, which will be clarified later) is presented to the intermediary again, which in its turn now formally asks VROM’s clearance to proceed. This will represent VROM’s most momentous decision, although this will only be definite after all conditions are met, implying acceptance by the formal CDM bodies (see hereafter), and after a final agreement is reached between parties on the amount of CERs to be delivered and its price.
- After VROM’s clearance, a Letter of Intent is signed between intermediary and project participants. This Letter of Intent specifies the intermediary’s interest of purchasing the CERs under specific terms and reserves the exclusive rights of the CERs generated by the project for the intermediary concerned, unless sharing the CERs with other parties was announced and considered acceptable in advance. From this moment on project participants can no longer negotiate selling CERs of this specific project with other (new) parties whether or not acting on VROMs behalf. For more details see annex C
- The project participant then improves the quality of the PCN up to the level of a Project Design Document (PDD) which the project participant presents for independent validation to a designated Operational Entity (OE) of its choice, bearing in mind that the OE has to be accredited by the Executive Board (EB). For the quality demands of the PDD see annex B
- The OE then reviews the PDD and any supporting documentation to confirm that at least the requirements have been met on:
participation in CDM schemes
additionality of GHG reductions (i.c. correct baseline)
comments of local stakeholders
judgement on other environmental impacts
provisions for monitoring, verification and reporting, laid down in an MVP (monitoring and verification protocol)
For details see annex A
- Finally the OE presents all results (including the Letter of Approval, which will be clarified later) in a validation report to the EB with a request to register it as an eligible CDM project; the OE also makes this validation report publicly available.
8. As soon as the validation report is available, intermediary and project participants negotiate the final conditions of an Emission Reductions Purchasing Agreement (ERPA). In these negotiations VROM may act as observer, since VROM will ultimately check whether the project’s fundamentals as described in the PCN are still met, in which case VROM will give final approval. By approving the ERPA VROM will definitely commit itself to pay for the purchase of the CERs on the agreed conditions.
9. Once the project has been accepted, begun and started producing CERs, project participants shall conduct suitable monitoring as described in the validated PDD.
10. An (other) OE, assigned by the project participants, then shall periodically verify and subsequently certify the volume of GHG emission reductions generated by the project. The certification report shall constitute a request to the EB for issuance of CERs equal to the verified amount of reduced GHG.
11. Assuming the EB does not decide to review the OEs conclusions, the issuance of CERs will be registered by the CDM registry administrator to the registry accounts of the parties and project participants involved, in accordance with their request. Subsequently payments will be executed.
In case standardized baselines for small scale CDM projects are made available by the EB, some of the above mentioned steps can be streamlined/simplified.
Besides the procedural steps described above it is crucial to sign the necessary agreements/ legal documents between the parties involved (for the quality details see annex C):