How to Implement Offset Projects
Although the project development process for projects implemented under a voluntary offset standard are somewhat different from Clean Development Mechanism procedures, the CDM project cycle can serve as a frame of reference to analyze the different standards.
Host Country Approval
The Project Design stage includes developing a project concept, choosing or developing a baseline and monitoring methodology, and stakeholder consultations. All of these elements are documented in the project design document (PDD).
A feasibility study of a potential offset project is conducted to assess its technical feasibility, investment requirements, development and operational costs, expected returns, administrative and legal hurdles, and project risks and pitfalls. Based on the results of the feasibility study, the project owner will decide whether or not to continue development of the potential offset project.
An offset project methodology defines the rules that a project developer needs to follow to establish a project baseline and to determine project additionality, to calculate emission reductions and to monitor the parameters (e.g. electricity produced by the project) used to estimate actual emission reductions. It is a generic recipe that can be applied to different projects of a given type (e.g. renewable power production) and applicability conditions (e.g. grid-connected). Under several programs, if no approved methodology exists for a specific project type, a project developer can submit a new methodology for approval to the Standard body (e.g. CDM, Gold Standard, VCS).
Project Design Document (PDD)
The Project Design Document (PDD) describes the project activity in detail and forms the basis for all future planning and administrative procedures. It contains a description of the chosen technology and explains the methodology used to define the baseline scenario, to confirm additionality and to calculate emission reductions. It also contains information on the monitoring of all relevant technical parameters (e.g. temperature, gas flow rates, electricity production, hours of operation, etc.) including how monitoring procedures will be established, measurements made, quality controlled, and records stored and accessed. It contains an estimate of the volume of emission reductions achieved by the project. Finally, it documents how the project contributes to sustainable development.
The PDD plays a central role in project development. It serves as the basis for evaluating all carbon credit transactions and contract proposals for an offset project. The PDD is used throughout the implementation phase to ensure that the project performs according to the parameters outlined in the document.
Offset projects under the CDM and under some of the voluntary standards are required to provide evidence that the project’s activities will not adversely impact local populations and other relevant stakeholders. To ensure that all relevant stakeholders have been provided an opportunity to comment on the proposed CDM project, the developer must inform them about the project through appropriate forms of media. The developer must respond to all stakeholder comments, and describe a course of action to minimize negative impacts. The outcomes of the stakeholder consultations must be documented in the Project Design Document (PDD).
Under the CDM, after the project developer has written the PDD, an independent UN-approved third-party auditor conducts the project validation. These auditors are called Designated Operational Entities or DOEs. The process of CDM project validation normally consists of four phases:
- a desk review of the PDD,
- on-site visits and follow-up interviews with project stakeholders,
- a 30-day public comment period after the PDD has been made available through the internet
- resolution of outstanding issues, and
- the issuance of the final validation report and written by the DOE. After completion, the validation report and the PDD are submitted to the CDM Executive Board for review and registration.
Voluntary standards do not always require validation and sometimes combine validation and verification. For details please read the detailed voluntary standard descriptions in the policy section of this website.
Final acceptance of a CDM project by the CDM Executive Board is not possible without the approval of the project’s host country. The project documentation must be submitted to the relevant authority, which checks the project activity against national rules and regulations and confirms the project’s compliance with the host country’s sustainability criteria. This screening process and host country requirements vary from country to country.
Voluntary offset projects generally do not need host country approval.
The CDM Executive Board’s decision to register a project is based on the review of the PDD, the validation report and public feedback. Once the CDM EB approves a project, it is officially registered as a CDM project.
In the voluntary market, most projects are directly approved by the project auditors and do not go through an additional registration process with the standard body. An exception to this is the Gold Standard, where project approval is done by the Gold Standard Technical Advisory Committee.
Project implementation can begin at any time during the project cycle. However, if the project is implemented before it is registered by the CDM Executive Board, the project developer must supply documentary evidence proving that it considered CDM revenues at the time of planning the project. The documentary evidence must be supplied at the time of seeking CDM registration. If documentary evidence is not supplied, then the project is likely to be rejected on the grounds that it is not additional.
Project developers are required to maintain records measuring the emission reductions achieved during a project’s operation phase. These records, maintained in a monitoring report, must be in accordance with the parameters and procedures laid out in the original PDD that was validated by the DOE and registered by the CDM EB. Emission reductions are issued based on the monitoring report. Therefore, a project developer must make the trade-off between having continuous CER income (many short monitoring periods) and lower administrative costs (long monitoring periods). There are no requirements as to how long or short a monitoring period must be, as they range from a few weeks to several years.
The monitoring that the project developer has done is then evaluated and approved by a third- party auditor. To minimize conflict of interest under the CDM, the validating auditor cannot also conduct project verification; a different auditor must be chosen for the task of Project Verification. The project developer submits the monitoring report to the auditor along with relevant supporting documents. The auditor undertakes a desk review of the report to ensure that the monitoring has been carried out in accordance with the procedures laid out in the original PDD. The auditor may also undertake a site visit, if necessary. Following the desk review and site visit, the auditor prepares a draft verification report, highlighting any issues in the process. Once the project developer resolves these issues, the auditor prepares the final verification and certification report, which also quantifies the actual emission reductions achieved by the project. Verification is done at time intervals freely chosen by the project developer or owner, usually determined by consideration for cost-saving (longer intervals) vs. frequent sales revenues (shorter intervals).
In the voluntary market, this is usually the last step before the sale of offsets can happen.
The verification report is submitted to the CDM EB for certification and issuance of CERs. The issued CERs are then transferred to the CDM registry account of the relevant project participant after the mandatory fees are paid to the UNFCCC secretariat.
In the voluntary market, most emission reductions are directly approved by the project auditors and do not go through an additional certification process with the standard body. An exception to this is the Gold Standard, where emission reduction approval is carried out by the Gold Standard Technical Advisory Committee.
At the commercialization stage, a project developer sells the carbon credits from a project to a buyer. The credits can either be sold directly to a company that uses them to meet its legally binding or voluntary emission reduction obligations, or they can be sold to a trading company that facilitates the transaction between the seller and the end user of the credits. A contract to sell the carbon credits from a project can be signed at any stage during the project development cycle. Depending on the project developer’s tolerance for risk, some will sign contracts as early as the planning stage (i.e. forward contracts), lock in the price and other terms, and insulate themselves from the risks of price volatility, while others will wait until the credits are generated, certified and issued before selling them (i.e. spot market sales). The project developer usually receives payment for the credits only after they have been delivered. However, in a few cases, a project developer may receive an advance payment. This is usually done if the project developer wants to bridge an investment gap or needs to meet cash flow requirements during the project’s implementation.