For the additionality calculations of Section 6.7, ideas such as an

‘under-benchmark probability’ (UBP) and an ‘over-benchmark probability’ (OBP) might be introduced. UBP and OBP have different purposes:

• UBP applies to the case without CER revenue. It is the probability that the IRR is less than the benchmark, or the probability that the additionality test is met. (For a deterministic analysis, if the project IRR is below the benchmark, the project will satisfy the additionality test, because the project is nonviable without CER revenue.) As UBP gets larger for any project, the probability of satisfying the additionality test gets larger. Amongst these projects, there may be environmentally nonworthwhile projects

(false positives). The probability of a project being rejected is 1-UBP, and amongst these there may be environmentally worthwhile projects (false negatives).

• OBP applies to the case with CER revenue (which is not part of the CDM additionality test, but which is of interest to investors).

It is the probability that the IRR is greater than the benchmark, that is the probability that the project is viable to an investor. (For a deterministic analysis, if the project IRR is above the benchmark, it is viable.) The value of OBP acceptable to an investor will reflect that investor’s risk attitude. Risk-averse investors would like projects with high OBP values; risk-seeking or public investors would accept lower OBP values.

• Environmentalists might argue for projects demonstrating a large difference between UBP and OBP values in an attempt to maximize the reduction in greenhouse gas emissions. A large difference between the IRR expected values for the without-CER revenue and the with-CER revenue cases implies that the CERs generated by the project have a large impact.

The issue arises as to what would constitute acceptable UBP and OBP levels. First, there is no need for the UBP and OBP requirement levels to be the same, or the same across all project types. As well, the levels can be changed depending on society’s goals in terms of the number and type of CDM projects it desires.

What do you think would be reasonable values to specify for UBP and OBP?