The question of whether emissions reductions are additional to what would have been achieved without the offset project depends on the counterfactual conditions without the project, i. e. the baseline. The baseline emissions are the greenhouse gas emissions expected in the absence of the proposed project. Because the credibility of an offset depends on additionality, it requires a quantifiable and verifiable baseline of emissions. Thus the establishment of the baseline is key in determining the extent to which a carbon offset project is additional under the CDM.

The expected timing of emission reductions or carbon storage benefits can depend on the dynamics of the baseline or reference case. To the extent that the baseline case involves a pattern of emissions over time, the earlier those emissions occur and can be reduced by a carbon-offset project, the sooner the project can claim offset credit. This timing can strongly influence the economic performance and risk exposure of a project. For this reason, the baseline needs to be updated during the project life, and the procedure for updating the baseline forms part of the monitoring and verification protocol for the project.

In order to reduce the controversy regarding additionality and baselines, specific criteria for establishing project baselines are needed. Ideally, baseline criteria should be universal, but the potential range of CDM projects is too diverse. The criteria for baselines may vary geographically across different countries and regions, as well as technologically across different sectors and types of projects.

Thus the baseline is not static, and time variations in the generation fuel mix must be captured in the baseline carbon intensity. This is where a benchmark approach can be used to simplify the analysis. The simplest benchmarks for baseline emissions from electricity generation are (i) to use the average emission rate for the entire system (i. e. total emissions divided by total sales) or (ii) to use the weighted-average marginal emission rate.

For the Santa Elisa project, the appropriate benchmark for the baseline is the second method, that is the weighted-average marginal emission rate. The reason for this is simply the logic that governs dispatching in a generation system dominated by hydroelectric sources. Hydro resources will always be dispatched as much as possible first. Thermal sources are dispatched only when necessary to meet larger loads.

Thermal sources are a significant component of the baseline case for the Santa Elisa project. Although the total generation mix will still be dominated by base-load hydro sources, most of these sources would operate either with or without the Santa Elisa project. Considering the emissions (zero) of these base-load hydro sources in the baseline carbon intensity, it would be misleading to use the average emission rate benchmark.

In order to proceed with the quantification of the baseline scenario for the project, we need to specify the basic principles to be followed in the baseline scenario. These principles should be guided by the discussion of additionality in the CDM, and it should be adapted to the actual situation in the electric power sector of Brazil. Once we have stated the principles for defining the baseline scenarios, we can explore the detailed analysis of electricity generation dispatching and expansion planning in order to identify the baseline generation sources. Then we can determine the corresponding baseline carbon intensities against which the project should be compared to determine net emission reductions. Finally, we need to consider the updating of these estimates in the future, as an input to the monitoring and verification plan for the project.

For the Santa Elisa project, we have used a baseline methodology in which both the current Brazilian energy system and the government expansion plans are included. In this context, we have taken into consideration the economic attractiveness of thermal plants in Brazil and the shift to private-sector financing which favors thermal sources and is less conducive to hydropower. As a result, the profile of new generating capacity is likely to be different from the existing installed capacity, and power-sector expansion shall include natural gas combined-cycle thermal stations. Renewable generation sources implemented with private-sector investment should, therefore, be considered “additional to any that would occur in the absence of the certified project activity.”

Using the method described, we can estimate the carbon emission intensity of the baseline generation that will be replaced by the output of the Santa Elisa project. During the lifetime of the project, this baseline intensity will depend on the type of thermal generating stations installed at the margin in the Brazilian system and their emissions rate. The specific details of the baseline sources might change and make adjustments necessary in relation to the baseline carbon emissions intensity values. We have selected a crediting period starting in 2002 for a maximum of seven years, which may be renewed two times.