The CDM Project Cycle

All CDM project activities must go through a project cycle. Although some steps in this cycle are the same as those applied by project developers, financiers and investors for normal projects, there are several aspects of the CDM process that are unique to emission reduction activities pursued under the CDM. The five major stages of the CDM project cycle are:

(1) Project Development
(2) Host Country Project Approval
(3) Project Validation and Registration
(4) Project Implementation and Monitoring
(5) Verification, Certification, Issuance of CERs

The key steps in the project cycle are described below and are presented in a flow diagram.  These procedures will apply to all CDM projects, excluding those that fall within the ‘small-scale' project categories.  Small-scale projects will be ‘fast tracked' through more simplified and streamlined procedures.

Stage 1: Project Development (PIN and PDD)

During this phase, project developers are recommended to start drafting a Project Identification (Idea) Note (PIN). A PIN includes preliminary information on the content of the project, the project owner, the anticipated financing plan, and a first estimate of GHG emission reductions. Such PIN can be brought to the attention of the DNA (see Step 2) to receive a first indication on the likelihood of national project support through a Letter of Endorsement (LoE) or a Letter of No-Objection.

In a second phase, the project developer must design the project, define the potential CDM project activity and obtain financing. A Project Design Document (PDD) has to be developed in accordance with the UNFCCC standards and CDM EB requirements posted on the UNFCCC official website at www.unfccc.int.

The PDD must provide comprehensive and accurate information on the potential CDM project activity, including a baseline study, and a monitoring plan. The PDD has to demonstrate that the proposed CDM project would be additional to what would have happened in the absence of the project. Further it must mention the crediting period that is chosen and has to show the average annual GHG emission reduction and the total expected CER volume during the crediting lifetime.

Further, and for the purpose of receiving host governmental approval, the project developer has to discuss the environmental, economic and social impacts of the anticipated project and should state how it perceives to contribute to sustainable development in the project host country.

It should be noted that development of a PIN may not be necessary from the perspective of the host country (DNA), however, project developers should seek indication whether their project/s will be further supported by the host country government at a very early project development stage through the submission of a PIN.

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Stage 2: Host Country Project Approval

Most of the developing countries have institutionalized a two-stage process for issuing governmental CDM project approval. In a first phase and following the submission of a PIN, the government will either issue a Letter of Endorsement (LoE) or a Letter of No-Objection provided the host country agrees in principle with the project idea and scope. Such letter usually serves a project developer to decide whether to continue or to stop a CDM project development activity.

In a second phase, the project developer will request governmental CDM project approval and authorisation by submitting the complete PDD with other required document to the Designated National Authority (DNA). The DNA will, following a certain procedure usually set out in a Presidential or Governmental Decree for authorisation of the DNA, issue a Letter of Approval (LoA).

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Stage 3: Project Validation and Registration

CDM projects must be validated by DOEs and registered by the CDM-EB in accordance with the CDM rules and procedures. Validation provides assurance that the project complies with all CDM and host country requirements.
The DOE conducting the validation will, at a minimum, take account of the following project characteristics and the risks relating to them:

• Comments invited and received from local stakeholders, and explanation of how comments were received and effected implementation decisions;
• Analysis of the environmental impacts of the project activity, including trans-boundary impacts, and whether the project participants or the host country considers those impacts ‘serious or significant';
• The project Baseline and Monitoring procedures;
• The quantity of emission reductions expected to be achieved by the project activity during the crediting lifetime of the project, taking account of possible indirect emission effects of the project (in particular, any compensatory GHG increase, commonly known as "leakage" effects);
• Any relevant UNFCCC and/or Kyoto Protocol criteria as well as host country requirements, such as sustainable development priorities.

Provided the Validation is ‘positive', the DOE will submit all necessary documents to the CDM EB together with a request for project registration. Once the request for CDM project registration is successful, the project proponent is required to pay the registration fee to the CDM EB. The fee is dependant from the annual CO₂e emission reduction potential. No registration fee has to be paid for CDM project activities with expected average annual emission reduction over the crediting period below 15,000 t CO₂ equivalent.

Unless otherwise arranged through a request for review from the participating parties or at least three members of the CDM EB, the proposed project activity is registered within eight weeks for normal-sized CDM project activities and within four weeks for small-scale CDM project activities.

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Stage 4: Project Implementation and Monitoring

Monitoring describes the systematic surveillance of a CDM project's performance by measuring and recording performance-related indicators relevant to the project. The monitoring plan as described in the PDD must be implemented. The DOE contracted for CER Verification and Certification will use the information and data collected through the monitoring plan to verify a project's emission reductions at later stage. The monitoring system should be capable of producing records on reported GHG emission reductions, social and environmental impacts and on project management, including monitoring, data collection and management systems.

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Stage 5: Verification, Certification and Issuance of CERs

Emission reductions must be verified and certified by a DOE before the CDM-EB can issue Certified Emission Reductions (CERs). Usually, the project has to contract a different DOE as for project Validation and for CER Validation/Certification. Only with the consent of the CDM-EB the same DOE may be contracted. For small scale CDM projects the same DOE can be contracted for both, Validation and Verification/Certification.

The verification process involves periodic auditing of monitoring results, the assessment of achieved CERs and checking the project activity's continued compliance with all relevant criteria. The monitoring and verification process is therefore the basis for the production and delivery of CERs to the project owners/developers and for any related revenue stream that the operator expects to receive. The audit process during verification will be  interactive, iterative and participatory. The DOE may use spot checks of data measurement and collection systems and interviews with the key project participants to determine the credibility and accuracy of the reported performance.

Certification is the written assurance by the DOE that, during the specified time period, the project activity achieved the reductions in anthropogenic emissions by sources of greenhouse gases that were verified.  If the EB is satisfied with the certification report, it will issue CERs to the project owners/developers or other nominated parties.

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The following graphics illustrates the CDM Project Cycle.

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