Clearing the final hurdle

Gareth Phillips, Global Product Manager, SGS - www.climatechange.sgs.com

Hopefully, by now, some Certified Emission Reductions (CERs) might actually have been created. Whether they can be transferred may be another issue, but the fact that some projects may have successfully completed the CDM project cycle is a very significant achievement; if they have, all involved are to be congratulated.

At the time of writing, however, no-one is quite there. What are the key issues facing the pioneers and what lessons can those following behind usefully expect to learn?

Application of the monitoring methodology
Monitoring methodologies have, in many cases, been prepared "blind". The project developers who have submitted them, and the Methodology Panel members who have worked on them, have had to predict how they intend to monitor the emissions from the project activity, possibly emissions from leakage, and in the case of an ex post baseline, the parameters that are required to determine the baseline. In many cases these will not be overly onerous, but it is possible to imagine a situation whereby the proposed and approved monitoring methodology does not actually gather the information required to determine the emissions and emission reductions. At least two potential "worst case scenarios" arise:

	The DOE selected to perform the verification and certification does not agree that the monitoring methodology, as approved and implemented, provides sufficient objective evidence to determine emission reductions in a transparent and conservative manner (bear in mind that the DOE is liable for the emission reductions it certifies).
	The monitoring methodology has not, in fact, been implemented as described and whilst the data collected may or may not be scientifically and technically appropriate to determine emissions and emission reductions, it is not in compliance with the approved methodology.

Both of these outcomes pose a serious threat to the delivery of CERs, potentially with consequent penalties. Fortunately, both risks can be effectively addressed by commissioning a preliminary verification, as required in some Emission Reduction Purchase Agreements (ERPA). In this case, the DOE visits the project shortly after commissioning and start-up and specifically checks for both of these issues, and at the same time prepares for the first periodic verification. Preliminary verification adds a small cost to total transaction costs, but a large proportion of the work undertaken during preliminary verification (what we refer to as the strategic review and risk assessment) has to be performed before the first verification anyway.

Treatment of uncertainty: The majority of monitoring methodologies to date say very little about uncertainty. This will lead to disappointments and financial penalties. Most methodologies to date simply require the operator to measure the parameters. There are few or no specifications about the type of measuring instrument or its required levels of uncertainty. What will happen when a meter is measuring outside its specified capacity? Or the meter is out of calibration or poorly installed? The DOE has no standard to assess the performance against and is therefore left to apply its own professional judgement. Bearing in mind the Executive Board’s (EB) preference for conservativeness and the DOE's liability, they are likely to impose higher rather than lower standards of practice, which are bound to act to reduce the number of Emission Reductions that are verified and certified. The onus, therefore, is on the project developer to ensure that its measurement instruments and procedures are working examples of good to best practice.

Institutional bottlenecks
EB procedures for issuance are now in place and will be tested with the first requests for issuance. DOEs post their clients' monitoring plans and, following a site visit to verify the data, submit their request for issuance. Issuance is automatic following a 15 day period, if there are no requests for reviews. The scope of review is restricted to issues of malfeasance, incompetence or fraud, which may or may not act to reduce the number of requests for review. The main bottleneck may be the functioning of the registries which do not currently (at the time of writing) allow the issuance and transfer of CERs. In the meantime, CERs may be stored in a holding account.

Verification and certification experience
The practice of verification is well established amongst DOEs that are active in schemes such as the EU ETS, UK ETS, CCAR (California Climate Action Registry) and other credible programmes that require verification by accredited third parties. Companies with this experience are more likely to be able to perform the verification efficiently and effectively, reducing the risk of a review being required. For example, they are likely to understand the concept of materiality and have a better understanding of the general reporting principles. DOEs that are part of international groups of companies further reduce risks, simply because of their networks and the backing of their brand names.

So, as you line up to face the last hurdle, bear some of these points in mind. You have worked long and hard and invested heavily to get this far. Now is not the time to take any further risks. Think seriously about a preliminary verification; consider the uncertainties associated with your monitoring plan and choose an experienced DOE that you can trust to see you safely over the finishing line!

7th September 2005

For more information: climatechange@sgs.com