CDM: amending crediting methodologies

Legal assistance paper

All reasonable efforts have been made to ensure the accuracy of this information at the time the advice was produced. However, the materials have been prepared for informational purposes only and may have been superseded by more recent developments. They do not constitute formal legal advice or create a lawyer- client relationship. To the extent permitted any liability is excluded. Those consulting the database may wish to contact LRI for clarifications and an updated analysis.

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Date produced: 07/12/2010

Is there a legal basis for amending/revising/clarifying an approved methodology so that the amended version will be immediately applicable if it is found that the methodology causes over-issuance of carbon credits?

Summary:

A revision of an approved methodology such as AM0001 could not apply retrospectively to currently registered CDM projects or to current crediting periods, by operation of various rules, including the CDM modalities and procedures, other procedures and Decisions.

The role of clarifications to methodologies play a specific role (largely there for the benefit of project participants to seek information from the secretariat/Meth Panel). However, a clarification, whilst not explicitly stated under the applicable rules to apply to current CDM projects or crediting periods, would not act so as to vary, amend or in any way change the methodology itself. In circumstances where the EB has already put on hold AM0001, and requested a revision for reasons consistent to those contemplated under the rules, then it would not appear, (at least without considering possible options under public international law), that there is a legal basis to apply an amended methodology to current projects and crediting periods.

Advice:

Background

At EB 58 , the CDM Executive Board (“EB”) took into consideration the outcome of the Meth Panel report on HCFC 22 production and HFC23 generation as related to methodology AM0001 (the “Methodology”). Based on this review, the EB (among other things):

• requested the Meth Panel to consider the extent of revision required of the Methodology based on the shortcomings identified in their report (and for the Meth Panel to report back at EB 61);

• agreed to put the Methodology “on hold with immediate effect”.

Scope of advice

We have considered whether the Methodology could be revised retrospectively in accordance with applicable legal rules, however, we have not considered principles of public international law / challenges to international law on the grounds that this is contrary to the aims or objectives of the Kyoto Protocol. This would need to be the subject of further, detailed analysis by academic or barrister with specific expertise in this area if it is an area which the enquirer would like to have addressed.

Putting “on hold”

In order to consider any possible legal basis to require that any amendment/revision/clarification to the Methodology apply to existing projects, it is necessary to consider the effect of putting the Methodology “on hold” under the UNFCCC, Kyoto Protocol and various CDM-related decisions of the COP/MOP (broadly referred to as the “CDM Rules” in this advice).

The starting position is that EB 27, Annex 10, paragraph 7 provides that:

“Should an approved methodology require a significant revision, its further use shall be put on hold and its revisions be undertaken in an expedited manner”.

Note here reference to “significant revision”. Whilst this is not defined, clearly the EB in its 58th meeting considers the revisions required to be significant notwithstanding that the Meth Panel has not yet come back with recommendations as to the extent of revision required to the Methodology.

What is the effect of putting a Methodology “on hold”?

The Procedure for the Submission and Consideration of Requests for Revision of Approved Baseline and Monitoring Methodologies and Tools for Large Scale CDM Project Activities (EB 54, Annex 2) currently governs the revision of methodologies. Part D deals with revisions of methodologies requested by the EB. Where the EB requests that a methodology is “put on hold with immediate effect” in a meeting report (as has been done in EB 58), paragraph 12(b) provides that in these cases, DOEs shall not upload any requests for registration of a project activity applying that methodology from 24 hours from the date of publication of the EB’s report containing the decision.

Can the “clarification” of an existing methodology apply to current projects and crediting periods?

EB 31, Annex 12 (Version 2) is the Clarification to Project Participants on when to request a revision, clarification to an approved methodology or deviation. Paragraph 3 does say that clarifications to approved methodologies may be carried out in response to requests recommended by the EB, Meth Panel or Working Groups in accordance with the latest version of the procedures. It should be noted that a “clarification” is given a very specific purposes in Paragraph 4, which is to:

“enable the DOEs and project participants via the DOE, to seek clarification on the applicability of an approved methodology… Therefore, should a methodology be unclear or ambiguous in this regard requiring further background information as to the conditions under which it is to be applied, project participants are advised to submit a request for clarification”.

In relation to HFC23, it is open to question whether the results of the investigation of the Meth Panel would be such that only a mere clarification is required. Based on the executive summary report, it would appear the Methodology requires to be amended or changed due to the risk of over-estimation of emissions reductions (among others) – which would go beyond a mere clarification.

The ability to seek clarification is primarily there for the benefit of project participants, although the EB itself can also seek clarifications from the Meth Panel. EB 42, Annex 9 (Version 06) is the Procedure for the submission and consideration of queries regarding the application of approved methodologies and methodological tools by DOEs to the Meth Panel. The end result of any clarification is that it will apply to the methodology once agreed by the EB and become publicly available on the UNFCCC website. The CDM Rules do not explicitly state that a clarification will apply to current crediting periods. However, this should not be surprising given that a clarification does not change, vary or amend a methodology. It merely provides guidance and clarification in respect to the way it is interpreted.

Given the political will to do so, the EB could, of course, seek a “clarification” from the Meth Panel designed to address the problem of over issuance of credits from existing registered projects even though, on proper analysis the “clarification” concerned effectively amounted to a methodology revision. The attractiveness of such an approach would be enhanced by the fact that there is currently no mechanism by which decisions may be challenged. However, such a step would seriously undermine confidence in CDM and the CER market and would thus, almost certainly be ruled out. In any event, having called for significant revision, the EB has already effectively conceded that the change necessary goes beyond a clarification.

What is a revision and how does it affect existing projects once the revision is complete?

Paragraphs 3 of Annex 10 to EB 27 (the Guidance on criteria for consolidations and revisions of methodologies) provides that a revision is a “modification of an approved methodology in order to improve it or broaden its scope and applicability. The revision results in the approved methodology with a new version number”. Paragraph 4(a) then provides that:

“4. A revision of an approved methodology may be carried out if one or more of the following conditions are considered to apply:

(a) new or better understanding of scientific evidence indicate that emission reductions may be over or under estimated based on the existing approved methodology or that the reductions may not be real, measurable and verifiable.”

Accordingly, based on the EB’s concerns with HFC23 as set out in EB 58, a revision of the Methodology may be carried out in circumstances where the EB considers that emissions reductions of certain HFC23 projects are being over-estimated.

EB 35 Annex 13 (version 09) which has since been superseded by EB 54, Annex 2, states in paragraph 1:

“Any revision to an approved methodology shall only be applicable to project activities registered after the revision… and shall not affect registered CDM project activities during their crediting periods”.

However, the currently applicable procedures for requests for revisions under EB 54, Annex 2 do not provide any useful guidance on this point. Importantly however, paragraph 39 of the CDM Modalities and Procedures (Decision 3/CMP.1) clearly states that:

“A revision of a methodology shall be carried out in accordance with the modalities and procedures for establishing new methodologies…. Any revision to an approved methodology shall only be applicable to project activities registered subsequent to the date of revision and shall not affect existing registered project activities during their crediting periods.” (our emphasis).

Accordingly, in our view, a revision to the Methodology would not, on the basis of the applicable CDM Rules, apply to the existing crediting periods in existing CDM project activities. The fact that Paragraph 4(a) of Annex 10 to EB 27 specifically contemplates the situation where a review is appropriate where emissions reductions are being over-estimated under the relevant methodology (as is the belief here), and that a review is clearly not stated to impact on projects already registered, would suggest that there is no legal basis to argue the contrary.