options for conformity assessment for cdm · ii.6. summary of preliminary tasks for conformity...

OPTIONS FOR PROCESS AND INSTITUTIONAL ARRANGEMENTSFOR CONFORMITY ASSESSMENT

FOR THE CLEAN DEVELOPMENT MECHANISM

NOVEMBER, 1999

nvironomics Incorporated 4405 East-West Highway, Suite 307 Bethesda, Maryland 20814 (301) 657-7762 / FAX: (301) 657-9025 http://www.environomics.com

nvironomicsENovember, 1999

TABLE OF CONTENTS

TABLE OF CONTENTS

I. INTRODUCTION SECTION I, PAGE 1I.1. Purpose 1I.2. Summary of Results 1I.3. Contents 2

II. OVERVIEW OF PROCESSES NEEDED AND OPTIONS SECTION II, PAGE 1II.1. Processes Used In Existing CA Programs 1II.2. Application of CA Processes to CDM 2II.3. Key Considerations Regarding Accreditation 3II.4. A Spectrum of Options for A Conformity Assessment Framework for CDM 5II.5. How Integrity of the CDM is Achieved and Maintained 10II.6. Summary of Preliminary Tasks for Conformity Assessment for CDM 10

III. NECESSARY PROCESSES FOR CDM & OPTIONS FOR INSTITUTIONAL ARRANGEMENTSSECTION III, PAGE1

III.1 Much Can Be Learned From Conformity Assessment Experience 1III.2. Existing CA Standards Can Likely Be Adapted & Organizations Utilized 2III.3. Conformity Assessment Process-Stages For Projects 3III.4. Conformity Assessment Process-Stages For The System 5III.5. CDM Institutions 8III.6. Two Illustrative Alternatives Representing A Spectrum of Options 11III.7. Integrity of CDM 18III.8. Comparison of Conformity Assessment With CDM Requirements 21

APPENDIX A. EXISTING CONFORMITY ASSESSMENT ORGANIZATIONS & INSTITUTIONAL ARRANGEMENTS

APPENDIX B. DEFINITIONS OF INSTITUTIONS AND THEIR POTENTIAL ROLES IN CDM

APPENDIX C. GLOSSARY OF PROCESS STAGES FOR CONFORMITY ASSESSMENT FOR CDM

APPENDIX D. QUESTIONS AND ANSWERS REGARDING CONFORMITY ASSESSMENT AND ITS APPLICATIONTO CDM

APPENDIX E. EXAMPLES OF ISO DOCUMENTS THAT MAY BE USEFUL IN DESIGNING CDM STANDARDS

REFERENCES

nvironomicsSection I, Page 1 ENovember, 1999

OPTIONS FOR PROCESS AND INSTITUTIONAL ARRANGEMENTS FOR CONFORMITY ASSESSMENT FOR CDM

I. INTRODUCTION

Article 12 of the Kyoto Protocol outlines the basic structure of the Clean Development Mechanism(CDM). While there has been some progress in defining the processes and institutional arrangements forconformity assessment for CDM, greater detail is needed. Moreover, there are alternative ways ofstructuring a conformity assessment framework for CDM, and the tradeoffs associated with these optionsshould be made clear to facilitate informed choices. Finally, there is substantial worldwide experienceregarding the types of verification required under CDM, and decisions regarding the CDM process andstructure should benefit from this experience.

This paper summarizes Environomics’ research regarding existing worldwide verification institutionsand processes, lessons learned, and their potential applicability to CDM. We also present two options toillustrate a spectrum of alternatives for conformity assessment processes and institutional arrangements.

I.1. PURPOSE

This paper describes detailed options for the process and institutional arrangements for conformityassessment for CDM. These options are based on:

• The requirements of the Kyoto Protocol regarding CDM,

• The experience of existing worldwide processes and institutional arrangements that requireverification, commonly referred to as “conformity assessment” (CA), and

• A desire to avoid needless duplication where existing guidelines, standards and institutions cancontribute to meeting CDM’s requirements.

I.2. SUMMARY OF RESULTS

Our main conclusions are that:

• Options for a conformity assessment framework that are appropriate for CDM can be differentiated bywhether 1) institutional arrangements for accreditation are worldwide or regional and 2) whether a singleoperational entity is allowed to perform both registration and follow-on audits for a given project. Wedescribe two options for a CA framework for CDM to illustrate a spectrum of alternatives.

• The needs of CDM conformity assessment can largely be met by emulating selected processesand institutional arrangements of existing conformity assessment institutions, and building uponsome of their guidelines and standards.

• The nature of CDM and the Kyoto Protocol’s requirements for “certified emissions reductions”(CERs) are sufficiently different from any existing CA arrangements, that no existing set ofstandards, institutions or institutional arrangements could be adopted wholesale.

nvironomicsSection I, Page 2 ENovember, 1999

• Many of the existing conformity assessment institutions could potentially play a role in CDM.

I.3. CONTENTS

This paper is structured by increasing level of detail, with Section II providing an overview andSection III providing a more complete discussion. Section III assumes that the reader is familiar withSection II, and therefore does not repeat this information. The paper is generally organized as follows:

Section II

1. Overview of what we can learn from existing conformity assessment (CA) programs andstandards development institutions,

2. Overview of key considerations regarding accreditation that are especially important for CDM,

3. Overview of the conformity assessment options for CDM that we present in this paper,

4. Summary of how integrity of the CDM is achieved and maintained under these options, and

5. Summary of preliminary tasks for a functional CDM conformity assessment system.

Section III

1. Description of the specific guidelines, standards and processes that can be adapted from existingconformity assessment programs.

2. Description of the specific roles and responsibilities of each actor in the CA options we present.

3. Discussion of how integrity of the CDM is achieved and maintained under these options.

We also include appendices that summarize or provide additional information on many of the topics:

-Appendix A Existing Conformity Assessment Organizations & Institutional Arrangements

-Appendix B Definition of Institutions for CDM and their Potential Roles

-Appendix C Glossary of Process Stages for CDM

-Appendix D Questions & Answers Regarding CA and its Application to CDM

-Appendix E ISO Documents that may be Useful in Designing CDM Standards

-References

Finally, we note that much of the discussion regarding institutional roles, responsibilities and processesfor CDM has used language that can have imprecise meanings, and which appear to be interpreteddifferently by different parties. We have attempted to be clear about the terminology we use, and to theextent possible have used the terminology common to conformity assessment. We have also included aglossary for all the terms we use (Appendix C).

nvironomicsSection II, Page 1 ENovember, 1999

II. OVERVIEW OF PROCESSES NEEDED AND OPTIONS

This section of the paper provides an overview of the elements of existing conformity assessment(CA) programs and standards development institutions, and their applicability to CDM. Applying theseresults in combination with the requirements of the Kyoto Protocol, we present two alternatives for theprocesses and institutional arrangements for a conformity assessment framework that would likely bemost appropriate for CDM. These two alternatives, which illustrate a spectrum of options, differ in termsof: 1) whether the institutional arrangements for accreditation are worldwide or regional and 2) whetheror not a single operational entity is allowed to perform both the registration and follow-on audits for agiven project. We describe how integrity is achieved and maintained under these options. We alsoidentify other important choices that must be made regarding the CA framework for CDM. Finally, weprovide a listing of some of the basic steps that will likely need to be undertaken to institute a conformityassessment framework for CDM.

It is important to note that this paper presents these two options primarily as a vehicle for illustratingthe processes and institutional interactions that will likely be needed for an effective, efficient andcredible conformity assessment framework for CDM, regardless of the specifics of the framework that iseventually chosen.

II.1. PROCESSES USED IN EXISTING CA PROGRAMS

There is already substantial experience in international commerce regarding how external verificationcan be successfully organized and performed to ensure that products and processes are acceptable.Standards are the bedrock of product or process assurance systems, specifying the design or performanceattributes of a product or process. Standards also specify the requirements for conformity assessmentinstitutions and processes. Conformity assessment is any activity associated with determining whether theapplicable standards are met. Conformity assessment includes auditing the product or process,accreditation of the auditors and auditing organizations (also known as the assessment bodies) ascompetent, and recognition of the accreditation body by an entity with the appropriate authority. Theoutcome of a successful assessment is a certification by the auditing organization that the product orprocess is in conformance with standards. This seal of approval is relied upon in commerce.

Defining, designing and creating the necessary institutions and procedures for CDM to perform thesefunctions need not reinvent the wheel. The verification functions and bodies that are likely to be neededfor a smoothly operating CDM are similar to conformity assessment processes and standardizationactivities that are now employed worldwide. While some aspects of CDM are unique (not the least ofwhich is the fact that the “product” in CDM is in fact the absence of a product – i.e., the absence of GHGemissions that would otherwise have occurred), the basics of conformity assessment still apply.

The basic process stages used in existing conformity assessment programs that we can adapt for CDMinclude:

1. Standard Setting, which establishes the basis for accreditation requirements, auditingrequirements, and product or process requirements.

2. Recognition by an appropriate authority that an organization has the qualifications toaccredit auditors and auditing organizations in accordance with standards.

3. Accreditation of auditors and auditing organizations by recognized accreditation bodiesupon determining that they are qualified in accordance with standards.


4. Initial Inspection by an accredited auditing organization to a) determine whether aproposal will result in a product, project or process that is likely to meet standards and tob) establish the specific future requirements for evaluating and auditing that product,project or process. A successful Initial Inspection leads to Registration.

5. Registration of the product or process by the accredited auditing organization if it meetsall of the requirements of the Initial Inspection and any other Registration requirements.

6. Periodic Audit by an accredited auditing organization to determine whether the productor process meets standards in accordance with the requirements of the Initial Inspectionand Registration. A successful audit leads to Certification by the assessment body.

7. Certification by the accredited auditing organization (assessment body) if the productpasses the requirements of the periodic audit.

II.2. APPLICATION OF CA PROCESSES TO CDM

The basic steps described above are also needed for CDM, but must reflect CDM’s uniquerequirements. These are summarized in Exhibit II.1 below, which describes how the conformityassessment processes could apply to CDM processes and organizations.

EXHIBIT II.1APPLICATION OF CONFORMITY ASSESSMENT PROCESSES TO CDM

CA PROCESS CDM PROCESS & INSTITUTIONS

Standard SettingStandards could be developed for or by an arm of the Executive Board (EB) to include: theaccreditation processes, the assessment processes, and calculation of GHG reductions(including baselines, leakage and additionality). Alternatively, the standards might be agreedto by the COP/mop, and carried out/enforced by the EB rather than established by the EB.

RecognitionIf the EB delegates the accreditation function, the EB will recognize Accreditation Institutionsor Organizations that are qualified to accredit Operational Entities (OEs) to perform InitialInspections & Registration, and Audits & Certification.

AccreditationPerformed either by an arm of the EB or by Accreditation Organizations recognized by the EBto evaluate the competence of personnel (individual auditors) and OEs to perform InitialInspection & Registration, and Audits & Certification. Includes ongoing surveillance of OEs.

Initial Inspection

This step occurs when the Operational Entity assesses, in accordance with standards, that theproject has the potential to provide GHG reductions.

If standards do not apply because the project is a “prototype,” then the EB (or a delegate or anarm of the EB) will make a determination regarding the appropriate standards to use.

This step also specifies all future audit requirements specific to the project.

A successful Initial Inspection leads to Registration, provided that all other required approvalsare obtained (e.g., regarding sustainability by the Host country).

Registration Upon a successful Initial Inspection, and upon further approval by the involved Parties asrequired by standards, the Operational Entity (OE) Registers the project.

Periodic AuditPeriodic audits are performed by Operational Entities (OEs) in accordance with standards andthe specifications of the Registration to determine the magnitude of the CERs and theirvalidity. Successful audits lead to Certification and Issuance of CERs.

CertificationUpon successful audit, the emission reductions are certified and CERs issued. The OE mayperform both of these functions; or the OE may only certify the emission reductions andrecommend to another body (such as the Executive Board) that the CERs be issued; or the OEmay recommend both certification and issuance to the EB.


II.3. KEY CONSIDERATIONS REGARDING ACCREDITATION

There are numerous international conformity assessment systems. The frameworks and details of thedifferent conformity assessment schemes vary widely, especially with regard to accreditation. Theexisting systems reflect the specifics of the purpose of the systems, the nature of the products, previoushistorical arrangements, and the countries involved. Some of these systems are based on a singleaccreditor that operates worldwide, others are based on the accreditors of participating nations, and otherssubstitute other processes to achieve the accreditation function. All of these systems are described inAppendix A. In this section, we draw upon the experience of existing CA systems to list some importantconsiderations and requirements for accreditation bodies, and we identify the implications for anappropriate system for accreditation within a CDM conformity assessment framework.

Important Considerations Regarding the Accreditation Function for Any CA System

There are a several key considerations regarding accreditation that are especially important to keep inmind when considering alternatives for a CDM conformity assessment framework:

• Accreditors must maintain a critical mass of competence. Regardless of how many accreditorsthere are, each must have and be able to maintain the necessary staff expertise to perform thisfunction. If accreditors cannot achieve and maintain adequate staffing, the integrity of the entireCA system will be jeopardized. At least in the initial stages of CDM, it does not seem likely thatmany host countries will have the necessary expertise to staff their own accreditation bodies.Moreover, as discussed next, it does not seem likely that many individual host countries wouldhave sufficient CDM activity to allow national accreditors to be independent or to maintain theircritical mass of competence.

• Accreditors must be financially independent of operational entities (OEs). For accreditors whosefinancial health is dependent on revenues they generate from providing accreditation services,each must have a sufficient “business base” so that decisions regarding accreditation for a specificOE are not influenced by financial concerns. At least in the initial stages of CDM, and perhapseven in later stages of CDM, it does not seem likely that there would be a sufficient number ofprojects in most host countries or a sufficient number of OEs in most host countries for this typeof independence.

• Accreditors should have enough accreditation activity to maintain/enhance competence. Themore experience that an accreditor can obtain, the better job the accreditor is likely to perform.The more accreditors there are, the less this can occur.

• Accreditors perform ongoing surveillance in addition to initial accreditation. Ongoing oversightof certification bodies (i.e., within a CDM context, the operational entities) is a critical function inany conformity assessment system. This would include, for example, periodically accompanyingand shadowing operational entities on selected audits. In most existing conformity assessmentschemes, the accreditation body is not only responsible for the initial accreditation (and periodicreaccreditation), but also for ongoing oversight of the certification bodies. In some conformityassessment schemes, the accreditation body relies upon other processes to provide the ongoingoversight, such as by requiring periodic peer review among certification bodies. When designinga conformity assessment system for CDM, it is important to ensure that the importantresponsibility for ongoing oversight and the approach used to achieve it is explicit and clear.


Implications for Accreditation within a CDM CA Framework

The above factors lead us to the following conclusions regarding the most appropriate approach foraccreditation within a CDM conformity assessment framework:

• A small number of accreditors would work best for CDM, at least in the initial stages. Weconclude that the most effective and reliable accreditation system for a CDM conformityassessment framework would be either:

1) a single accreditor that serves on a worldwide basis, or

2) several accreditors (perhaps as few as three but probably not more than four or five)that serve on a regional basis.

This would assure that accreditors have a critical mass of competent staff that is financiallyindependent of OEs and project developers.

• The EB should supervise, but not perform the accreditation function. While the EB couldconceivably perform the accreditation function if a single accreditor framework is chosen, webelieve that it would be more effective for the EB to recognize another body to perform thatfunction. First, we believe that this improves the integrity of the system because the EB can thensupervise the accreditor (or accreditors if they are regional). Secondly, this addresses theconcerns that some Parties have regarding unnecessary bureaucratic expansion of the EB itself.

• Accreditors should perform the ongoing surveillance function. In existing conformityassessment systems, the ongoing surveillance function is traditionally performed by theaccreditor, but can also occur through peer review by the certification bodies (i.e., the OEs inCDM). We believe that there is greater system integrity if the accreditors perform the ongoingsurveillance function, especially since some potential OEs have indicated skepticism regardingthe extent to which peer review could be relied upon for this purpose for CDM. In one of theoptions we describe in the next section, we have included peer review by OEs as a possiblesupplement to surveillance by the accreditor, but not as a replacement for it.

• In the initial stage of CDM, the accreditor(s) may require some funding. In drawing the aboveconclusions, we have in part assumed that accreditors will eventually need to be financially self-sufficient, relying on fees from OEs and project developers to pay for accreditation services(including ongoing surveillance). Note, however, that does not mean that an accreditor willnecessarily be self-sufficient at the start. For new conformity assessment programs, accreditorshave sometimes been quasi-governmental in the sense that they have received funding fromgovernmental sources in the initial stage of a program. Such start-up funding may be necessaryto initiate CDM in a timely manner, and may avoid in the early years some of the concernsregarding potential conflicts of interest that might arise 1) when accreditors are financiallydependent on individual OEs or 2) when accreditors don’t have the financial ability to maintain acritical mass of expertise. The strategy and means for initial funding for accreditors and thetransition to long-term self-sufficiency should be clear and established at the outset.

As a general matter, it is important to keep in mind that any conformity assessment system for CDM(and CDM itself, for that matter) may require a transition period before it can realistically be fullyput into place. During this transition, the EB (or others) may have a greater role or different role thanenvisioned for the long term. A key to minimizing the transition period is to explicitly plan for it.


II.4. A SPECTRUM OF OPTIONS FOR A CONFORMITY ASSESSMENT FRAMEWORK FOR CDM

There is a spectrum of options for a conformity assessment framework for CDM that reflect theconsiderations described earlier in this paper. This section provides an overview of the options, which aredescribed in more detail in Section III of this paper. We identify functions that the EB or some otherhigh-level CDM organization will likely need to provide for CDM, illustrate how accreditation might beorganized, and describe alternatives regarding the responsibilities of operational entities.

Potential Functions of the Executive Board

Based on the Kyoto Protocol and the standard requirements of conformity assessment systems, wehave identified a number of functions that will likely need to be provided in order for CDM to operate.We believe that responsibility for these functions lies most logically with the Executive Board, but theymust lie somewhere if not with the EB. We do not address how the Executive Board might choose tomeet these responsibilities. Many of these functions could be delegated in part or in their entirety, so thatthe full-time staffing of the EB might be relatively modest. However, regardless of how the workload isallocated, we believe that it would be most effective for a single entity, such as the EB, to maintainoverall responsibility for ensuring that CDM operates efficiently and reliably. These functions include:

• Developing Policy as needed regarding the operation of CDM,

• Managing the CDM, including maintaining records and reporting,

• Developing standards for CDM as needed, and

• Managing the conformity assessment process including:

- recognizing organizations that perform the accreditation function for CDM,

- performing prototype evaluations (initial inspection and subsequent registrationfor innovative projects for which standards do not yet apply),

- ensuring that national baselines are developed appropriately, and

- performing periodic surprise audits as needed for accreditors, OEs, and projectsto help ensure the integrity of the CDM system and CERs.

We believe that all of these functions, which are described further in Section III, are essential for CDM tooperate effectively. While these functions should all be managed by a single high-level CDM entity suchas the EB, much of the work itself may be delegated to other organizations or performed by standing,temporary or rotating committees. We do not address options for the EB in this paper.

Two Alternatives for Accreditation

As explained earlier, we believe the most appropriate approach for accreditation for conformityassessment in CDM would be for the EB to recognize either a single worldwide accreditor, or torecognize regional accreditors. This allows the EB to provide oversight of the accreditor(s), and ensuresthat the accreditor(s) have a critical mass of competence that they can maintain without being financiallydependent upon OEs.


In addition to accrediting OEs, the worldwide or regional accreditor(s) would also be responsible forthe essential function of performing ongoing surveillance of the OEs to ensure that they are performingproperly.

Finally, when there are multiple accreditors, it is a standard practice in existing conformityassessment systems for the accreditors to perform peer review among each other to help ensure theintegrity of the accreditation system. In addition, this would reduce much of the workload of the EB infulfilling the oversight function for accreditation, but would not eliminate it. Therefore, we assume thatthis peer review process would be required for any alternative with more than two accreditors in order torealize the additional benefits for system integrity that can be achieved by this process.

Two Alternatives for the Responsibilities for Operational Entities

We are concerned that there may be a potential conflict of interest (or at least the appearance of apotential conflict) when a single operational entity both registers a project and then performs the follow-on periodic audits for the project. It is conceivable that an OE might be swayed in its initial inspectionand determinations regarding registration for a project by the financial prospect of performing thesubsequent audits for the project. This potential conflict of interest might be of greatest concern for OEsthat are relatively new, small, and have limited initial prospects for performing OE services.

There are several alternatives for addressing this concern. One possibility is to require OEs todemonstrate that they have erected adequate protections (“firewalls”) internally to prevent potentialconflicts of interest – for example, within an OE, the initial inspection might be performed by onedivision, while the follow-on audits are performed by another division. Another possibility is to prohibitan OE from performing the follow on audits for a project if it performed the initial inspection forregistration.

To provide an added measure of integrity in either case, it might be useful for OEs to peer review oneanother. As stated earlier, this would be a supplement to the ongoing surveillance provided by theaccreditor, not a replacement for it. The greater the concern about conflict of interest, the greater thebenefit this added peer review might provide.

Spectrum of Options

The two alternatives described above for accreditation and the two alternatives for OE responsibilitiestogether represent four options as follows:

1. 1 worldwide accreditor w/ a single OE performing both registration and audits for a project

2. 1 worldwide accreditor w/ different OEs performing registration and audits for a project

3. 3-5 regional accreditors w/ a single OE performing both registration and audits for a project

4. 3-5 regional accreditors w/ different OEs performing registration and audits for a project

To simplify the presentation in this paper, we represent these four options with the two extremes: #1.a worldwide accreditor with a single OE for a project, which we term the “Worldwide Accreditor” optionand #4. 3-5 regional accreditors with different OEs performing registration and follow-on audits for aproject which we term the “Regional Accreditor(+)” option. In addition, for the “Regional Accreditor(+)”option, we have included peer review among OEs (as a supplement to ongoing surveillance byaccreditors) to provide a focal point for considering the desirability of this process for OEs.


The institutional arrangements for the two options are shown in Exhibit II.2.. The process stages for aproject under the two options is shown in Exhibit II.3. – note that in both cases, projects pass through thesame steps, with differences only in the organizations involved. For these options, we have assumed thatthe approval by the involved parties (i.e., the host country and if needed, the involved Annex 1 country)would occur before the initial inspection since this approval is a relatively low-cost step compared to thecost associated with either the initial inspection or, if needed, prototype evaluation. We also assumed thatboth the Host Country CDM Office and the OE would receive the project submission, so that that OEcould be available to address questions from the Host Country CDM Office.

Comparison of the Worldwide Accreditor Option with the Regional Accreditor(+) Option

From the standpoint of accreditation:

• The Worldwide Accreditor Option has the benefit of appearing simpler and easier to manage, andmight be easier to institute initially. In addition it should be relatively easier for this option toassure a critical mass of competent staff that is financially independent of OEs and projectdevelopers, and it might be quickest to wean from government funding support.

• The Regional Accreditor(+) Option has the benefit of providing the ability for the regionalaccreditors to perform peer review on one another, thereby reducing the demands on the EB toperform ongoing surveillance of the accreditors. This process may also enhance integrity to theextent that the peer review process provides an extra measure of review, and to the extent thatregional accreditors are better able to handle high workloads. Finally regional accreditors may bemore favorably viewed by host nations since they are regional rather than worldwide institutions.

From the standpoint of the responsibilities of operational entities:

• The Worldwide Accreditor Option addresses the potential conflict of interest that OEs mayexperience by requiring them to demonstrate that they have dealt adequately with the issue. Forexample, the OE could have a different division perform the initial inspection/registration for aproject than the division that performs audits/certification for that project.

• The Regional Accreditor(+) Option eliminates the potential conflict of interest by prohibiting anOE from performing both the initial inspection/registration for a project and the follow-onaudits/certification for the project. In addition, to provide an extra measure of integrity, thisoption calls for peer review among OEs as a supplement to ongoing surveillance by accreditors.

In this overview section, we do not compare the two options further. However, Section III comparesthese two options in terms of:

1) equivalence of accreditations,2) rigor and credibility of accreditation,3) transparency of the accreditation process,4) efficiency for accreditors and OEs,5) sovereignty,6) barriers to entry,7) equivalence of assessments,8) rigor and credibility of assessments, and9) transparency of the assessment process.


Exhibit II.2Institutional Arrangements for CDM Standardization and Conformity Assessment

Overview of Two Alternatives Illustrating a Spectrum of Options

Worldwide Accreditor Option Regional Accreditor + Option

Executive Board• Policy Functions• Management Functions• Standards Functions• Conformity Assessment Functions

• Recognition• Assessments (surprise audits)• Prototype Evaluation• Baselines

Operational Entities• Initial Inspection Divisions• Audit Divisions

Projects• Developers• Operators

Executive Board• Policy Functions• Management Functions• Standards Functions• Conformity Assessment Functions

• Recognition• Assessments (surprise audits)• Prototype Evaluation• Baselines

Initial InspectionOperational Entities

Projects• Developers• Operators

3-5 Regional Accreditor Organizations

AuditOperational Entities

Host Country CDM Office• Baseline Determination Function• Sustainability Assessment Function

Registration and Certification Registration Certification

Other Involved Parties• Approval of Projects

Host Country CDM Office• Baseline Determination Function• Sustainability Assessment Function

Other Involved Parties• Approval of Projects

1 Worldwide Accreditor Organization


Worldwide Accreditor Option Regional Accreditor(+) Option

III. Initial Inspection or Prototype Evaluation

• Host Country examines sustainability

• Initial Inspection Division of an OE performs Initial InspectionOR

• Prototype Evaluation group within the Executive Board or an armof the EB performs Prototype Evaluation

II. Approval of Involved Parties

Both models require projects to pass through the same steps. The only difference is that in the Worldwide Accreditor option, OEs may performboth Initial Inspections and Audits, while in the Regional Accreditor(+) Option, different sets of OEs perform the different functions.

I. Project Submission• To Host Country CDM Office and• Initial Inspection OE


• Host Country examines sustainability

• Initial Inspection OE performs Initial InspectionOR

• Prototype Evaluation group within Executive Board or an arm ofthe EB performs Prototype Evaluation

II. Approval of Involved Parties

IV. Project Registration• Initial Inspection Division of an OE Registers Project with EB

IV. Project Registration• Initial Inspection OE Registers Project with EB

V. Project Implementation V. Project Implementation

VI. Audit• Audit Division of an OE Audits the project

VI. Audit• Audit OE Audits the project

VII. Certification• Audit Division of an OE might 1) certify reductions and issueCERS, 2) certify reductions recommend issuance of CERs to theEB, or 3) recommend certification and CER issuance to the EB

VII. Certification• Audit OE might 1) certify reductions and issue CERS, 2) certifyreductions recommend issuance of CERs to the EB, or 3) the OEmight recommend certification and CER issuance to the EB

Exhibit II.3Process Stages Flow Chart for CDM Standardization and Conformity Assessment

Overview of Two Alternatives Illustrating Representing a Spectrum of Options

I. Project Submission• To Host Country CDM Office and• Initial Inspection Division of an OE


II.5. HOW INTEGRITY OF THE CDM IS ACHIEVED AND MAINTAINED

The processes and institutional arrangements themselves provide for credible results by ensuring 1)the competence, honesty and accountability of actors, and 2) that each actor has appropriate roles andresponsibilities. Adherence to standards and accreditation ensures the integrity of the system and theCERs. Routine peer review, a commonly used process in conformity assessment, would further assurethat accreditation bodies and assessment bodies are continuing to perform up to standard. In addition, anarm of the Executive Board could perform periodic surprise reviews of accrediting bodies, operationalentities, and projects to further ensure integrity. These activities are listed below:

• The Executive Board’s standardization of methods for establishing reference baselines, projectmethods, measurement, monitoring and calculation methodologies, initial inspection procedures,audit procedures and accreditation procedures.

• The EB’s recognition of accreditation agencies.

• The routine peer review of accreditation agencies.

• The periodic surprise review by the EB of some accreditation agencies’ procedures.

• The periodic surprise review by the EB of some accreditations.

• The accreditation agencies training and accreditation of individual auditors and OEs.

• The periodic re-accreditation of operational entities.

• The routine peer review of operational entities.

• The operational entities’ initial inspections and audits of projects.

• The periodic surprise review by the EB of some OEs procedures.

• The periodic surprise review by the EB of some project registrations or certifications.

Taken together, standards, accreditation and internal vigilance (maintained by peer review and occasionalsurprise review by the EB) would provide a high level of confidence in the integrity of CERs.

II.6. SUMMARY OF PRELIMINARY TASKS FOR CONFORMITY ASSESSMENT FOR CDM

There are a number of tasks that the COP and the Executive Board would likely need to undertake inorder to establish a functioning conformity assessment regime for the CDM. The following list representssome of the more important steps, in addition to making basic decisions about the CDM conformityassessment framework:

1. Decide on the EB’s functions, determine the extent to which these functions will be fully orpartially delegated, establish necessary core EB committees/offices so that the EB can begin tooperate, and delegate responsibilities as appropriate. Specifically:

i. Determine how CDM policy would be set (e.g., will there be EB Voting Representatives?)and put it into place.


ii. Establish a central office for the EB to manage/coordinate its responsibilities, consistent withthe responsibilities it delegates and the responsibilities it maintains.

iii. To the extent responsibilities are to be partially or fully delegated, determine how this will bedone, identify or establish the organizations/committees, and initiate the process.

2. Develop and promulgate standards.

i. Identify existing relevant standards that may be adapted

ii. Identify and engage existing experts in standards development and in relevant fields such asforestry and engineering.

iii. Develop qualification standards and operational guidelines for accreditation, operationalentities and audit personnel.

iv. Develop project standards.

v. Develop procedures for initial inspection, prototype evaluation and audit

vi. Develop guidelines for developing baselines, and assist and review in development ofbaselines.

3. Establish the accreditation function by either beginning

i) the process of recognizing accreditation agencies, including managing peer review or

ii) develop the capability to accredit operational entities and audit personnel.

nvironomicsSection III, Page 1 ENovember, 1999

III. NECESSARY PROCESSES FOR CDM & OPTIONS FOR INSTITUTIONALARRANGEMENTS

This section of the paper provides a more detailed discussion of the applicability of existingconformity assessment programs to CDM, necessary processes for CDM, and options for institutionalarrangements for CDM. This section is organized according to the following main points:

1. Much can be learned from existing conformity assessment and standardization organizations andprocesses.

2. Many existing standards can be adapted for use within CDM, and many existing organizationscan participate in various CDM activities.

3. There are a number of distinct conformity assessment process-stages for projects that wouldlikely be needed for CDM in order to ensure the integrity of certified emissions reductions.

4. There are a number of distinct conformity assessment process-stages that would likely be neededin order to ensure the integrity of the entire CDM system.

5. There are distinct types of institutions with differing skills and levels of authority that wouldlikely be needed in the different process stages of CDM.

6. Two alternatives for institutional arrangements illustrate a spectrum of options for meeting theneeds of CDM. These options have relative advantages and disadvantages.

7. The different actors and process stages of CDM serve to add integrity, transparency, andconfidence in the CDM process and products. The risk of legal liability, loss of profits and lossof reputation provide further disincentive for negligence and cheating.

8. There are a number of similarities and differences between CDM and “regular” conformityassessment that should be understood when drawing upon the substantial existing body ofconformity assessment experience to design a conformity assessment system for CDM.

III.1 MUCH CAN BE LEARNED FROM CONFORMITY ASSESSMENT EXPERIENCE

Much can be learned from existing conformity assessment (CA) and standardization organizationsand processes:

• Standardization bodies’ procedures can be mirrored.

• CA administrative bodies’ procedures can be reproduced.

• CA procedures can be emulated.

• CA institutional relationships can be a basis for CDM institutional relationships.

• Appropriate existing international frameworks for accreditation can be adapted for CDM.

These are discussed further below.


Standardization Bodies Procedures Can Be Mirrored

Several existing organizations that develop and promulgate standards do so in processes that couldeasily be mirrored by arms or designates of the Executive Board. These organizations include ISO (theInternational Organization for Standardization) and IEC (the International Electrotechnical Commission(These procedures are discussed in more detail in Appendix A.)

CA Administrative Bodies’ Procedures Can Be Reproduced

Several existing organizations that administer or have “upper level” roles in conformity assessmentschemes use procedures that can be reproduced by arms or designates of the Executive Board. Theseorganizations include IEC’s Conformity Assessment Board, accreditation mechanisms administered byANSI (the American National Standards Institute) and NIST (the National Institute of Standards andTechnology). (These procedures are discussed in more detail in Appendix A.)

CA Procedures Can Be Emulated

Several stages of current conformity assessment procedures, as well as the techniques used withinstages, can be emulated by a conformity assessment scheme designed for CDM. (These procedures arediscussed in more detail in Appendix A.)

CA Institutional Relationships Can Be A Basis For CDM Institutional Relationships

The institutional relationships between existing standards development and conformity assessmentorganizations can be the bases for a CDM conformity assessment system. Existing conformityassessment institutional arrangements, such as the relationships between, and the roles, of accreditationbodies, certification and registration bodies (“operational entities” in the parlance of CDM), auditors(assessment personnel), and the entities being assessed are relevant and transferable to CDM. (Theserelationships are discussed in more detail in Appendix A.)

Appropriate existing international frameworks for accreditation can be adapted for CDM.

As discussed in Sections II.3 and II.4, the single worldwide accreditor model is most applicable forCDM, and could be extended to a regional accreditor model with perhaps 3-5 accreditors worldwide.This would assure that accreditors have the necessary critical mass of competent staff that is financiallyindependent of OEs and project developers, and would also be the easiest accreditation models toestablish.

III.2. EXISTING CA STANDARDS CAN LIKELY BE ADAPTED & ORGANIZATIONS UTILIZED

Many existing standards can likely be adapted for use within CDM, and many existing organizationscan likely participate in various CDM activities:

• ISO guides and standards can be adapted.

• ISO expertise can be utilized.

• Expertise from existing accreditation organizations could be utilized.


• Existing certification and registration bodies could be used.

These are discussed further below.

ISO Guides and Standards Can Be Adapted

ISO has published (sometimes jointly with IEC) a number of guides and standards which can be quiterelevant to CDM. Most of the documents are designed for general use and thus would act as the bases ofCDM standards and guides. Among the most potentially relevant are the guidelines for draftingstandards, general requirements for operation of accreditation organizations, general requirements forbodies operating product certification systems, most of the ISO 14000 series of standards and guides onenvironmental management systems, and others. (A detailed list of potentially applicable ISO standards isavailable Appendix F.)

ISO Expertise Can Be Utilized

High level discussions between ISO and UNFCCC have and continue to take place on the role thatISO might have in assisting to draft standards for CDM. Moreover, ISO has established a working groupon climate change issues. UNFCCC and the COP could continue to take advantage of ISO expertise. (Afurther discussion of the potential role of ISO can be found in Appendix A.)

Expertise from Existing Accreditation Organizations Could Be Utilized

The existing entities that serve as worldwide accreditation bodies do not have the expertise to performthe necessary accreditation functions for CDM. Other existing accreditors that would most readily beable to obtain the needed expertise might not be considered appropriate for CDM since they are typicallystrongly identified with specific nations or programs with prominent representation from specificinterests. It is more likely that a new accreditation organization(s) will need to be formed for CDM.Nevertheless the expertise from existing accreditation organizations could provide important guidanceand assistance for establishing the new CDM accreditor(s), and might even have a continued usefulformal role by serving on the CDM accreditors’ board.

Existing Certification and Registration Bodies Could Be Used

CDM Operational Entities (OEs) can be drawn from the ranks of existing certification andregistration bodies. (Note that the definition of the terms “certification” and “registration” differ in aCDM context from their definitions in existing conformity assessment. Please see the glossary for moreon this issue.) Private businesses such as SGS and DNV, both of which are assessment bodies accreditedto operate in multiple fields, have undertaken assessments of AIJ projects. SGS, DNV and a host of otherentities could function as OEs for CDM. (Further discussion of potential OEs is provided in Appendix A.)

III.3. CONFORMITY ASSESSMENT PROCESS-STAGES FOR PROJECTS

There are a number of distinct conformity assessment process-stages for projects that would likely beneeded for CDM in order to ensure the integrity of CERs. (Discussions of conformity assessment processstages for the CDM system in general immediately follows the discussion of CA for projects. Discussionsof the particular actors that are appropriate at each stage can be found in the following sections.) Theremay be additional actions that nations deem necessary for themselves, or that investors or developersagree to with the assessment agencies. We believe that the following conformity assessment stages arelikely to be requisite for the purposes of CDM.


1. When a project is proposed as a CDM project, its potential to create CERs would be assessed inan initial inspection. A prototype evaluation would be performed for innovative projects.

2. Once a project has been assessed and approved, it would then be registered. The registrationwould specify any project-specific requirements, such as calculation methods, audit schedule, etc.

3. Once a project wishes to claim credit for reducing or sequestering emissions, and has maintainedreports of all of its monitoring activities, its reported claims would be assessed in a periodic audit.

4. After a successful audit, i.e., one in which the assessors did not find error or fraud, the emissionsreductions claimed by the project would be certified (CERs are generated) and issued.

5. Depending on the quantity of CERs claimed, the nature of a particular project, or perhaps on thebasis of statistical sampling, projects could be subject to an periodic second surprise audit.

These stages are discussed below.

1. Assessing Potential To Create CERs – Initial Inspection & Prototype Evaluation

When a project is proposed as a CDM project, its potential to create CERs must be assessed. This ex-ante assessment would likely include several factors that directly relate to the project’s potential.

In some cases, the project will be well understood and standards for implementation and assessmentof the type of project will already be developed. Borrowing from the language of existing productconformity assessment, we refer to this stage as initial inspection, and assume that it would include:

- An assessment of the project’s baseline calculations.- An assessment of the project’s additionality,- An assessment of potential leakage,- An assessment of the project’s methods for reducing or sequestering GHGs,- An assessment of the project’s plans for monitoring and auditing,- An assessment of the project’s potential contribution to sustainable development.

In other cases, the project will be a novel concept for which standards have not been developed, or forwhich baselines have not been established. We refer to this stage as prototype evaluation and assume thatit would be a hybrid of conformity assessment and standards development. Prototype evaluation wouldentail the same functions as initial inspection, but would also include a standards development facet sothat the project could be measured.

2. Registration

Once a proposed project has been assessed and validated, it must be registered. Registration itselfmight entail no more than a simple form submission, but its function is very important. Registrationserves notice to investors and potential investors that the project has been officially accepted as a CDMproject, thereby granting some fundamental level of confidence. Registration also lists the project fortracking purposes. Registration also stipulates and specifies all project-specific requirements includingcalculating CERs and performing periodic audits, including frequency, intensity and content.


3. Periodic Audit

Once a project wishes to claim credit for reducing or sequestering emissions, and has maintainedreports of all of its monitoring activities, its reported claims must be assessed. The purpose of this ex-post assessment, which we refer to as the audit, would be verify that the project’s reported claims are trueand accurate. The auditing bodies would perform the audits with all necessary due diligence, seekingboth error and fraud in the reports. Audits may recur periodically on an annual or biannual basis. Thismay depend on the project lifetime, or uncertainties regarding project performance. Auditing bodies, toassure conformance with the registration requirements, which embody applicable standards, would:

- review records,- inspect a sample of the data,- inspect the equipment used to reduce or sequester emissions,- inspect the equipment used to monitor equipment,- review the methodologies and calculations used, and- inspect and review other project aspects which have bearing on emissions reductions.

4. Certification

After a successful audit, i.e., one in which the assessors did not find error or fraud, the emissionsreductions claimed by the project are certified (CERs are generated). Certification is the final seal ofapproval for emissions reduction claims. Certification does not guarantee that the emissions reductionsare real, rather it provides a high level of confidence that the reductions are real. Assessors, byundertaking their roles with all due diligence, provide the public with reasonable assurance that theclaims are true. Since it would be virtually impossible for assessors to verify every piece of reported data,their assessments cannot be guarantees. If fraud or error is concealed to the extent that due diligence doesnot detect them, the emissions may still receive certification. (Further discussion of other means ofpreventing error, fraud and liability under CDM are contained in the following section.) Uponcertification, the appropriate body would issue CERs.

5. Periodic Second Surprise Audit

The purpose and effect of the conformity assessment system (accreditation of OEs, ongoingsurveillance of OEs, audit of projects by OEs, and assignment of specific liabilities) is to ensure thecompetence of the parties involved, to minimize potential conflicts of interest and to discourage cheating.The purpose of the periodic surprise audit is to actually detect cheating and to further discourage it fromoccurring. It is not likely that surprise audits of projects will be frequent, and they might occur only ifproblems are discovered regarding the OEs for the project. In addition, based on EB policy regarding thisactivity, projects might be subject to a second surprise audit, depending on the quantity of CERs claimed,the nature of a particular project, or perhaps on the basis of statistical sampling, projects may be subject toa second, surprise audit. The surprise audit would not be conducted by the same organization thatconducted the original audit, nor should it be conducted by a competitor of that organization. Like anaudit by the U.S. Internal Revenue Service of tax filings, the surprise audit may review the entire originalaudit, may only choose to review a particular facet of the original audit, or may choose to delve muchdeeper than the original. Although the surprise audit is not frequent, it has an important role in theconformity assessment system and provides an extra assurance of system integrity.

III.4. CONFORMITY ASSESSMENT PROCESS-STAGES FOR THE SYSTEM

There are a number of distinct conformity assessment process-stages that could be needed to ensurethe integrity of the entire CDM system in general:


1. Development and promulgation of standards.

2. Recognition of accreditation agencies by an authoritative body.

3. Accreditation of assessment personnel and OEs to the same standard and ongoing surveillance bythe accreditation body of the OEs.

4. Peer review among Accreditation Bodies (if there are multiple accreditors as in the regionalmodel).

5. Peer review among Operational Entities (as a possible supplement, but not replacement forongoing surveillance by the accreditation body).

6. Periodic surprise audits.

7. Threat of liability for negligence and fraud.

8. Review reference baselines

These are discussed below.

1. Standards

Standards must be developed and promulgated. Though standards development is not technically apart of conformity assessment, it is the bedrock for all conformity assessment activities. Standards mustbe developed for implementation of projects and for measurement of implementation. Standards exist toensure product and process uniformity. The goal of standardization under CDM would be to ensure thatall CERs are fungible. In order to achieve this goal, standards would likely need to be developed for:

- Implementation of all kinds of projects (energy sector, forestry, etc.),

- Calculation of project impacts and performance (monitoring requirements, calibration ofinstruments, methodological approaches, etc.),

- Calculation of project scenario assumptions (project baselines and reference baselines, leakage,additionality, etc.),

- Assessment processes (initial inspection and registration, auditing and certification), and

- Accreditation processes (for both personnel and for assessment bodies).

2. Recognition of Accreditation Bodies

If an arm of the Executive Board will perform all accreditation functions as described below (in 3.Accreditation), then recognition is not necessary. However, if the EB delegates its authority to accreditOperational Entities to other organizations, then there must be a formal process where these organizationsare recognized by the EB. Accreditation agencies cannot simply declare themselves to have standing toaccredit assessment bodies and personnel. If that were the case, the entire conformity assessment systemcould be weakened by the presence of under-qualified or poorly accredited assessors. The process ofaccreditation requires a very high level of skill and expertise in conformity assessment. Accreditation


agencies should receive official recognition by a central, authoritative body, that they are competent andqualified to accredit. Recognition is usually granted after a full assessment of an accreditation agenciesprocedures and competence.

3. Accreditation and Ongoing Surveillance

Assessment organizations must be accredited to the same standards, as do accreditation personnel.Accreditation of project assessment bodies (operational entities) and their personnel (the auditors) is theprimary method to ensure equivalent auditing practices for projects and competent audits. Accreditationalso helps to ensure that auditors and operational entities are free from conflicts of interest. Finally,accreditation helps ensure process transparency.

Accreditation does not have any bearing on the results of any particular project assessment.Accreditation confirms that an organization, or an individual has the ability to carry out assessmentscompetently and honestly. Accreditation and periodic re-accreditation minimizes the possibility thataudits will be incorrectly performed or subject to fraud.

Operational entities and auditors would be accredited to perform specific functions, similar to themanner in which universities are accredited to grant degrees in specific fields. Under CDM, separateaccreditation would be needed for initial inspection and for periodic audits because the types of personnel,skill levels and subject matter are very different for these two processes. In addition, separateaccreditations would likely be needed for different types of projects, such as energy and forestry projects.Thus, OEs would likely need to be separately accredited for performing initial inspections for differenttypes of projects; and would likely need to be separately accredited for performing audits for differenttypes of projects. Accreditation is valid for a limited period of time and would need to be periodicallyrenewed.

It is standard procedure for accreditation bodies to follow up with those they accredit to ensure thatthe assessment bodies continue to use qualified personnel and apply required audit procedures. Thisongoing surveillance can include accompanying an assessment body on-site during an audit to observeperformance. This quality control activity occurs in addition to the requirement for periodic re-accreditation.

4. Peer Review Among Accreditation Bodies

Peer review among accreditation agencies is an additional way to ensure the qualifications of anaccreditor on an ongoing basis. Peer review can be the means through which an accreditation agencymaintains its status. The peer review process can reduce the need for the EB to perform ongoingsurveillance of the accreditation bodies. Peer review also helps ensure process transparency and processequivalence. Peer review among accreditors is a common procedure in existing conformity assessmentprograms, and has proven to be effective.

5. Peer Review Among Operational Entities

An additional option to ensure the competence, honesty and equivalence of assessments is peerreview among operational entities. Peer review among OEs is not an alternative to accreditation, nor is itan alternative to the ongoing surveillance of OEs by accreditors. Peer review among OEs might beconsidered a useful supplement to the ongoing surveillance by accreditors. However, peer review amongaudit bodies is not a common practice in current conformity assessment programs, although we note thatit has been used in related programs such as for financial accounting firms. To the extent that the ongoing


surveillance by accreditors is deemed adequate, then also requiring peer review among OEs might beconsidered to be unnecessary.

6. Periodic Surprise Audits

The threat of surprise audits of projects, of operational entities, or of accreditation agencies could beanother method to help ensure integrity. As discussed in the previous section, the purpose of theconformity assessment system (standards, recognition of accreditors, accreditation of OEs, ongoingsurveillance of OEs, clear assignment of liability, etc.) is to ensure the competence of the parties involved,to minimize potential conflicts of interest and to discourage cheating. However, the only mechanismavailable to actually detect cheating is the surprise audit performed by or for the EB. An arm or designateof the Executive Board could choose to audit accreditors, OEs or projects based on “red flag” factors asdiscussed earlier. In addition, an arm or designate of the EB could also choose to audit an accreditor, OE,or project based purely on statistical sampling methods. The audits would essentially be a double checkof a previous accreditation or audit, and could be more or less thorough than the original. Although thesurprise audit is not frequent, it has an important role in the conformity assessment system and providesan extra assurance of system integrity, just as the surprise audit performed by the U.S.I.R.S helps assureintegrity of the U.S. tax collection system.

7. Liability for Negligence or Fraud

Though not a process-stage per se, the threat of liability for negligence and fraud are factors that addto the system’s overall integrity. Actors could be held liable for their specific functions, but not forfactors beyond their control. Thus, project developers and operators could be liable for fraudulent claims.If the operational entities do not perform due diligence in auditing the project’s records, the OEs and theproject operators could potentially be held jointly and severally liable. If the OE’s oversight was directlyattributable to an error in accreditation and training, the accreditation agency could theoretically share inthe liability.

A potential way to limit tort claims and reduce confusion regarding liabilities and responsibilities is toarticulate responsibilities in the contractual arrangements between assessors and projects. Letters ofengagement, as are used by financial auditors, can be useful in defining all roles and responsibilities.

Operational entities should not be saddled with the full burden of liability. OEs provide reasonableassurance that records are true and accurate; they do not provide guarantees. If all liability rests with theOEs, there will either be a significantly limited number of OEs willing to accept CDM work, or thepotentially high costs of liability insurance that OEs will bear will be absorbed by projects.

8. Review Reference Baselines

Baselines for sectors, activities, or for nations, should be established according to standardizedprocedures and could be reviewed by an arm or designate of the EB.

III.5. CDM INSTITUTIONS

There are distinct types of institutions with differing skills and levels of authority that would beneeded in the different process stages of CDM:

1. The Executive Board

2. Host Country CDM Offices


3. Accreditation Agencies

4. Operational Entities

Each of these is discussed below.

1. The Executive Board

The Executive Board would be responsible for policy and overall administration of the CDM. Wehave identified a number of functions that will likely be necessary for CDM to function. We believe thatthe responsibility for these functions lies most logically with the Executive Board, but they must liesomewhere if not with the EB. We do not address how the EB might choose to meet theseresponsibilities. Many of these functions could be delegated in part or in their entirety, so that the full-time staffing of the EB might be relatively modest. However, regardless of how the workload isallocated, we believe that it would be most effective for a single entity, such as the EB, to maintainoverall responsibility for ensuring that CDM operates efficiently and reliably. We would be concernedabout the viability and effectiveness of a framework in which overall responsibility is fragmented.Examples of the functions that are likely to be needed include:

Policy Development- Many broad policy decisions as well as detailed choices about how CDMis implemented will likely need to be made on an ongoing basis. Becauseof the nature of these choices, it seems likely that a voting body, such asa board of directors for the EB might be responsible for this type offunction. Alternatively, the COP/mop might address only major policyquestions, or might address all policy questions. In either case, the EBwould carry out the policy as needed.

Management- There are a number of administrative requirements that the EB would beresponsible for including managing and coordinates day to day functionsof the EB, maintaining registries of accreditations, assessments, CERs,etc..

Standards Development– The COP/mop might make the major decisions regarding standards, withthe EB providing the more technical decisions. Alternatively the EBmight be fully responsible for establishing standards. To develop neededstandards, the EB could delegate some responsibility to otherorganizations or to temporary, standing or rotating committees. Somepermanent expertise within the EB itself may be appropriate to manageand undertake this activity.

Conformity Assessment- The EB would have a number of conformity assessment responsibilities,many of which could be delegated, and some of which cannot.

Accreditation or Recognition: If the EB does not delegate accreditationactivity, then the Council would oversee an Accreditation function bywhich the EB accredits OEs and assessment personnel, as well asperform ongoing surveillance of OEs. If the EB does delegateaccreditation activity, then the EB would recognize qualifiedaccreditation agencies to perform this work. In addition, the EB or an


arm or delegate of the EB would coordinate peer review among theaccreditors and perform surprise audits as appropriate.

Assessments: Based on EB policy, an arm or delegate of the EB wouldperform surprise reviews of some OEs and assessments. Reviews mightalso be performed in response to requests.

Prototype Evaluation: An arm or delegate of the EB could performPrototype Evaluations. Prototype evaluations are an Ex-ante initialinspection function that is part assessment and part standardsdevelopment for: i) innovative methods of reducing or sequesteringGHGs; and ii) for baseline / leakage/ additionality issues not yetstandardized. Part of this function could include answering questionsposed by project developers regarding non-standard submissions. Thiscould be a Standards function instead.

Baseline Review: This function reviews the modeling and calculationsfor baselines.

2. Host Country CDM Offices

Host Country CDM Offices would administer CDM projects in their countries. These CDM Officeswould be responsible for:

- assisting in the development of baselines,

- developing sustainability criteria,

- assessing projects for sustainability, and

- providing formal host country approval of the project.

3. Accreditation Agencies

If an arm or designate of the EB does not perform accreditations, then this function would beperformed by one or more accreditation agencies. Accreditation agencies would be responsible foraccrediting the OE firms and the OE assessment personnel, as well as performing ongoing surveillance ofthe OEs to ensure they are performing adequately. Accreditation would be specific to different types ofassessments (e.g., forestry or energy), as well as for different stages of assessment (e.g., initial inspectionor audit). OEs are basically the “clients” of the accreditation agency.

As discussed in detail in Section II, we believe that the most appropriate accreditation framework forCDM is based on either a single worldwide accreditor or 3-5 regional accreditors. This approach ensuresthat the accreditors are able to maintain the necessary competence and be free from financial dependenceon individual OEs. The EB would be responsible for ongoing surveillance of the accreditors to ensurethey are performing properly. However, if there are three or more accreditors, the oversight workload forthe EB can be reduced because the accreditors can perform peer review on one another to help insure theintegrity of the accreditation function.

As discussed in Section II, there may need to be a transitional period in which the accreditor(s)receiving some governmental funding until they are able to become financially self-sufficient. It is also


possible that in a transitional period, the EB itself might initially perform some accreditations of OEs, buttransfers this role to accreditation agencies once they are established and recognized by the EB.

4. Operational Entities

Operational entities would be needed to perform initial inspections and registrations, as well as auditsand certifications. In current conformity assessment institutions, the work of actually verifyingconformance to standards and granting a final seal of approval (i.e., registering or certifying) are oftenperformed by different divisions of an OE. This might be an appropriate procedure to require for CDMOEs as well to help ensure impartiality and integrity.

It might also be appropriate for different OE firms to perform the different stages of assessment on agiven project. There is some potential conflict of interest created if the same OE responsible forperforming the initial inspection and registering the project can also audit and grant CERs. The potentialexists for the promise of later work to influence an OE to be more lax on the initial inspection. While thismay be less of a real potential for established OEs who have other established lines of business, this islikely to be a more significant concern regarding relatively new OEs who have few initial prospects forproviding OE services.

At the very least, different divisions within an OE firm should be responsible for performing initialinspections and audits. This is a natural division because many of the skills and much of the expertiserequired for the two functions are significantly different:

• The assessors performing initial inspection must be able to:

- determine if projects are standard or innovative (If innovative, proposals may need to berouted to EB for Prototype Evaluation),

- determine if existing standards for baseline / leakage/ additionality apply. (If non-standard orif other issues exist, proposals may need to be routed to EB for Prototype Evaluation), and

- understand the broad implications of issues like baselines, leakage, additionality, etc..

• The assessors performing audits must have skills similar to financial accountants, including:

- being able to interpret the records of the projects, and

- being able to determine if there is evidence of fraud or error.

III.6. TWO ILLUSTRATIVE ALTERNATIVES REPRESENTING A SPECTRUM OF OPTIONS

Exhibit II.2, from the previous Section of this paper, provided an overview of two alternatives thatrepresent a spectrum of options for the conformity assessment framework for CDM. These optionsdiffered primarily in how the accreditation function is organized, and secondarily in the extent to whichindividual OEs are limited in the services they can provide for specific projects. The specific functions ofeach institution or organization were also indicated in Exhibit II.2. These two exhibits are expanded uponin the following exhibits:

- Exhibit III.1A provides a more detailed chart for the Worldwide Accreditor Option, showing theinstitutions and their interactions.


- Exhibit III.1B provides a more detailed chart for the Regional Accreditor(+) Option, showing theprocess stages for a project.

- Exhibit III.2A provides a more detailed chart for the Worldwide Accreditor Option, showing theinstitutions and their interactions.

- Exhibit III.2B provides a more detailed chart for the Regional Accreditor(+) showing the processstages for a project.

The process steps are nearly the same in both: standard setting, recognition, accreditation, initialinspection, registration, periodic audit and certification. The same information and the same activities areundertaken for both options, although they are performed by different organizations. The exhibits reflectthe discussion in this section regarding the functions of each of the organizations. For these options, wehave assumed that the approval by the involved parties (i.e., the host country and if needed, the involvedAnnex 1 country) would occur before the initial inspection. We also assumed that both the Host CountryCDM Office and the OE would receive the project submission in the first step, so that that OE could beavailable to address questions from the Host Country CDM Office.

As also noted in Section II, the differences between the two options are summarized below.

From the standpoint of accreditation:

• The Worldwide Accreditor Option has the benefit of appearing simpler and easier to manage, andmight be easier to institute initially. In addition it should be relatively easier for this option toassure a critical mass of competent staff that is financially independent of OEs and projectdevelopers, and it might be quickest to wean from government funding support.

• The Regional Accreditor(+) Option has the benefit of providing the ability for the regionalaccreditors to perform peer review on one another, thereby reducing the demands on the EB toperform ongoing surveillance of the accreditors. This process may also enhance integrity to theextent that the peer review process provides an extra measure of review, and to the extent thatregional accreditors are better able to handle high workloads. Finally regional accreditors may bemore favorably viewed by host nations since they are regional rather than worldwide institutions.

From the standpoint of the responsibilities of operational entities:

• The Worldwide Accreditor Option addresses the potential conflict of interest that OEs mayexperience by requiring them to demonstrate that they have dealt adequately with the issue, suchas having a different division within an OE perform the initial inspection/registration for a projectthan the division that performs audits/certification for that project.

• The Regional Accreditor(+) Option eliminates the potential conflict of interest by prohibiting anOE from performing both the initial inspection/registration for a project and the follow-onaudits/certification for the project. In addition, to provide an extra measure of integrity, thisoption calls for peer review among OEs as a supplement to ongoing surveillance by accreditors.

Together, these options represent a spectrum of possibilities for a conformity assessment framework forCDM.

Nove

Exhibit III.1-AInstitutional Arrangements for CDM Standardization and Conformity Assessment

Worldwide Accreditor Option

Accredit

EXECUTIVE BOARD

Policy Function: Political, representative body that is ultimately responsible for oversight of CDM; Meets once or twice a year to vote and set policy (perhaps more frequently initially);

Delegates authority and responsibilities to various EB offices.

Standards Function: Representative bodies comprising technical experts in specific fields;Develop and publish standards under consultation with IPCC, SBI & SBSTA, ISO, etc..

Management Function: Manages and coordinates day to day functions of the EB;Maintains registries of accreditations, assessments, CERs, etc..

Conformity Assessment Function:

Oversees the following functions which might be performed by committees:

Recognition: Recognizes accreditation organization.

Assessments: Reviews accreditor, OE’s and assessments on surprise basis and on sample basis;Might conduct some reviews upon request

Prototype Evaluation: Performs Prototype Evaluations - Ex-ante function that is part assessment and part standards development for: -innovative methods of reducing or sequestering GHGs; AND -for baseline / leakage/ additionality issues not yet standardized.Answers questions posed by project developers regarding non-standard submissions

Baselines: Reviews modeling and calculations of baselines.

Init

Au

Init

DevOp

• Develop baselines• Develop sustainability criteria• Assess projects for sustainability• Approve or reject projects

HOST CDM OFFICEReview of BaselinesRecognition

1 WORLDWIDE ACCREDITOR
• Accredits OEs for Initial Inspection and for Audit• Accredits auditors (employees of OE firms)• Performs ongoing surveillance of OEs• Submits to oversight by the EB
nvironomicsSection III, Page 13 Ember, 1999

ation & Ongoing Surveillance

OPERATIONAL ENTITIES

ial Inspection Divisions: -Must be able to determine if projects are standard or innovative (If innovative, proposals are routed to EB for Prototype Evaluation);

-Must be able to determine if existing standards for baseline / leakage/ additionality apply. (If non-standard or if other issues exist, proposals are submitted to EB for

Prototype Evaluation);-Perform Initial Inspections -- Ex-ante broad-scope assessment of project

proposals that lead to Registration.

Assessment personnel receive accreditation in addition to organization accreditation;

dit Divisions: Perform Audits and Certifies Emissions Reductions or submits recommendations of CERissuance;

ial Inspections and AuditsPROJECT

elopers: Submit proposals to Registration OEs.erators: Submit reports to Audit OEs based on approved monitoring and measurement protocols.


Exhibit III.1-BProcess Stages Flow Chart and Actors for CDM Conformity Assessment

Worldwide Accreditor Option

I. PROJECT SUBMISSIONProject Developers propose project to Host Country CDM Office AND to Accredited Initial Inspection Division of Operational Entity

Initial Inspection Division of Accredited Operational Entity determines if project will use standard methodologies for reducing, sequestering andcalculating GHGs or if there some project aspect (including baselines/ leakage/ additionality) for which standards have not yet been developed.

Projects in which standards have beendeveloped for all aspects.

IIIA. Initial Inspection by Accredited Operational EntitiesAn OE performs Initial Inspection validation to assess if: 1) the projectis proposing to use standard and applicable methodologies to reduce orsequester GHGs; 2) the project’s calculations of baselines, additionalityand leakage are done according to standards and are acceptable; 3) theproject has the capability to produce CERs; 4) the project is proposing touse applicable standards to monitor and calculate GHGs; 5) the projecthas an appropriate audit plan in place.

IIIB. Prototype Evaluation by Executive BoardThe Prototype Evaluation group responsible for thisfunction performs Prototype Evaluation -- part assessment,part standards development to assess and approve thevalidity of the project’s proposed methods and theapplicability of the methods to the proposed project. Thisfunction also serves as a tool for developing new standardsfor future use.

II. Approval of Involved PartiesHost Country Lead CDM Office determines if project meets host nation’s sustainability criteria.

Involved Annex I country reviews project, if needed.

IV. Project RegistrationInitial Inspection Division of Accredited Operational Entities Register project with the Executive Board as a CDM project.

V. Project Implementation

VI. AuditAudit Division Accredited of Operational Entities Audit the project to verify that the project developers’ monitored and reported

results are true and accurate.

VII. CertificationAudit Division of Accredited Operational Entities certify the emissions reductions (issue CERs) or recommend issuance of CERs

Yes

Stop or redesign proposal


Projects in which standards have notbeen developed for all aspects.

No


Exhibit III.2-AInstitutional Arrangements for CDM Standardization and Conformity Assessment

Regional Accreditor(+) Option

Recognition

EXECUTIVE BOARD

Policy Function: Political, representative body that is ultimately responsible for oversight of CDM;Meets once or twice a year to vote and set policy;Delegates authority and responsibilities to various EB offices.

Standards Function: Representative bodies comprising technical experts in specific fields;Develop and publish standards under consultation with IPCC, SBI & SBSTA, ISO, etc..

Management Function: Manages and coordinates day to day functions of the EB;Maintains registries of accreditations, assessments, CERs, etc..

Conformity Assessment Function: Coordination of peer review of Accreditors;

Oversees the following functions which might be performed by committees:

Recognition: Recognizes accreditation organizations

Assessments: Reviews accreditors, OE’s and assessments on surprise basis and on sample basis;Might conduct some reviews upon request

Prototype Evaluation: Performs Prototype Evaluations - Ex-ante function that is part assessment and part standards development for:

-innovative methods of reducing or sequestering GHGs; AND-for baseline / leakage/ additionality issues not yet standardized.

Answers questions posed by project developers regarding non-standard submissions

Baseline: Reviews modeling and calculations of baselines.

INITIAL INSPECTION OPERATIONAL ENTITIES

• Must be able to determine if projects are standard orinnovative (If innovative, proposals are routed to EB forPrototype Evaluation);• Must be able to determine if existing standards forbaseline / leakage/ additionality apply. (If non-standardor if other issues exist, proposals are submitted to EB forPrototype Evaluation);• Perform Initial Inspections -- Ex-ante broad-scopeassessment of project proposals that lead toRegistration.

• Assessment personnel receive accreditation in additionto organization accreditation;• Organization submits to regular peer review by otherOEs.

• Perform Audits and Certifies EmissionsReductions or submits recommendations ofCER issuance;

Initial Inspections

PROJECTDevelopers: Submit proposals to Registration OEs.Operators: Submit reports to Audit OEs based on approved monitoring and measurement protocols.

3-5 REGIONAL ACCREDITORS

• Accredits Initial Inspection OEs and/or Audit OEs• Accredits auditors (employees/contractors of OE firms)• Performs ongoing surveillance of OEs• Submits to oversight by EB and to regular peer review

• Assessment personnel receive accreditation in additionto organization accreditation;• Organization submits to regular peer review by otherOEs.

Accreditation

AUDIT OPERATIONAL ENTITIES

Audits

• Develop baselines• Develop sustainability criteria• Assess projects for sustainability• Approve or reject projects

Baseline Committee Trains and Reviews

HOST CDM OFFICE


Exhibit III.2-BProcess Stages Flow Chart and Actors for CDM Conformity Assessment

Regional Accreditor(+) Option

I. PROJECT SUBMISSIONProject Developers propose project to Host Country CDM Office AND to Accredited Initial Inspection Operational Entity

Initial Inspection Operational Entity determines if project will use standard methodologies for reducing, sequestering and calculating GHGs or if theresome project aspect (including baselines/ leakage/ additionality) for which standards have not yet been developed.

Projects in which standards have beendeveloped for all aspects.

IIIA. Initial Inspection by Accredited Initial Inspection OperationalEntitiesAn OE performs Initial Inspection to assess if: 1) the project isproposing to use standard and applicable methodologies to reduce orsequester GHGs; 2) the project’s calculations of baselines, additionalityand leakage are done according to standards and are acceptable; 3) theproject has the capability to produce CERs; 4) the project is proposingto use applicable standards to monitor and calculate GHGs; 5) theproject has an appropriate audit plan in place.

IIIB. Prototype Evaluation by Executive BoardThe Prototype Evaluation group responsible for thisfunction performs Prototype Evaluation -- partassessment, part standards development to assess andapprove the validity of the project’s proposed methodsand the applicability of the methods to the proposedproject. This function also serves as a tool fordeveloping new standards for future use.

II. Approval of Involved PartiesHost Country CDM Office determines if project meats host nation’s sustainability criteria.

Involved Annex I country reviews project, if needed.

IV. Project RegistrationAccredited Initial Inspection Operational Entities Register project with the Executive Board as a CDM project.

V. Project implementation

VI. AuditAccredited Audit Operational Entities Audit the project to verify that the project developers’ monitored and reported results

are true and accurate.

VII. CertificationAccredited Audit Operational Entities certify the emissions reductions (issue CERs) or recommend issuance of CERs

Yes

Stop or redesign proposal


Projects in which standards have notbeen developed for all aspects.

No


Comparison

The two illustrative options can be compared across a number of factors as they relate to accreditationand as they relate to the functions performed by Operational Entities.

The following compares the maximum streamline and maximum integrity alternatives in terms ofhow they affect accreditation:

• Equivalence of Accreditations. Under the Worldwide Accreditor model, one accreditor performsall accreditations, thus a slightly higher degree of equivalence might be expected. Under theRegional Accreditor model, equivalence is still ensured because the EB recognizes all accreditors,accreditors must meet the same standards, and because each accreditor must undergo peer review.

• Rigor and Credibility of Accreditation. Under the Worldwide Accreditor model, the one group ofexperts performing the accreditations concentrates expertise in one organization; conferringaccreditation in this manner provides a high degree of expertise, authority and control which canimprove the rigor and credibility of accreditation. However, if demand for accreditation andongoing oversight is heavy, the burden of performing multiple accreditations under deadline andfor organizations and personnel around the world may diminish the quality of accreditations.Managing the workload is less likely to be a problem under the Regional Accreditor model.Further, peer review in the Regional Accreditor model adds to the credibility of accreditations bymaking the process more transparent. Peer review also adds an element of continuous learningthrough knowledge transfer that is absent in the Worldwide Accreditor system.

• Transparency of Accreditation Process. Peer review in the Regional accreditor model makes thesystem transparent. Transparency would be less if only a single body performs accreditations, asunder the Worldwide Accreditor model..

• Efficiency. Depending on the number and distribution of CDM projects and OEs, it may be moreefficient to delegate the authority and responsibility for accreditation to a number of bodies (as inthe Regional Accreditor model) than to have a single body perform all accreditations worldwide.

• Sovereignty. Allowing Operational Entities to be accredited by regional accreditors may beviewed by host nations as according more sovereignty than if there is only a single worldwideaccreditor.

• Barriers to Entry. It might be easier for OEs to enter the market if they could receiveaccreditation from one of several accreditors (especially if they are regional), as in the RegionalAccreditor model, than from one accreditor, as in the Worldwide Accreditor model.

With regard to OE’s, the Regional(+) Accreditor Option’s requirement for peer review among OEs,and the limitation on OEs regarding the performance of both Initial Inspections and follow-on audits for aproject could also apply in the Worldwide Accreditation Option. The following compares the WorldwideAccreditor Option and the Regional(+) Accreditor Option in terms of how they affect OperationalEntities and the functions they perform:

• Equivalence of Assessments. The requirement for peer review among OEs may result in a greaterequivalence of assessments.


• Rigor and Credibility of Initial Inspection. If the same firm may perform the initial inspectionand the subsequent periodic audits, there is the incentive to provide a more lax initial inspectionin order to guarantee future work. The threat of liability might dampen the incentive to cheat, butthe chances of being caught are lessened if only one OE performs both types of assessments for aproject. Therefore, the Regional Accreditor(+) model provides greater credibility (and potentiallyrigor) for the initial inspection. Note that the Worldwide Accreditor model could also limit OEsin this way.

• Transparency of Assessment Process. Peer review in the Regional Accreditor(+) Model enhancestransparency compared to the streamline model. The Regional Accreditor integrity model furtherenhances transparency since different OEs perform the initial inspection and the subsequentaudits for a project. Note that the Worldwide Accreditor model could also include theserequirements.

• Efficiency. Allowing individual OEs to perform both the initial assessment and subsequent auditsfor a project probably makes the system more efficient for project developers: the developers’search costs are lowered, and OEs that perform both might offer a lower package price (note,however, that this also could be interpreted as evidence of a potential conflict of interest withinthe OE). In other respects, the two systems are equally efficient: the OEs would still be requiredto obtain two types of accreditation even if both functions were performed by the same firm, andthe projects would still require two types of assessments.

• Sovereignty. We do not believe that either system offers a significant advantage over the other.

• Barriers to Entry. If individual OEs were to be allowed to perform both types of assessments fora single project, firms that only offer one type will be at a competitive disadvantage. If OEs canspecialize in one type of assessment, more OE firms would likely enter the market.

III.7. INTEGRITY OF CDM

The processes and institutional arrangements themselves provide for credible results by ensuring that1) each actor is competent, honest and accountable, 2) the potential for conflict of interest is minimized,3) each actor has appropriate roles and responsibilities, and 4) appropriate liability is borne be eachparticipant. Adherence to standards, accreditation and routine peer review help ensure the integrity of thesystem and the CERs. In addition, an arm of the Executive Board can perform surprise reviews ofaccrediting bodies, operational entities and projects to further ensure integrity. Finally, the risk of legalliability, loss of profits and loss of reputation provide further disincentive for negligence and cheating.

The two charts on the following pages, Exhibit III.4 for the Worldwide Accreditor model and ExhibitIII.5. for the Regional Accreditor(+) model show how systemic integrity is achieved via the two optionsdiscussed in this Section. From the standpoint of system integrity, the Regional Accreditor(+) model mayprovide an extra measure of assurance relative to the Worldwide Accreditor model as follows:

• Accreditation Function. If CDM can support as many as 3 accreditors, then peer review amongaccreditors provides an extra measure of assurance.

• Assessment Function. Eliminating the potential conflict of interest that might arise if a single OEmay perform both the initial inspection and the follow-on periodic audits for a project.


Exhibit III.4CDM System Integrity

(Worldwide Accreditor Model)

Executive BoardStandards Function: Ensures StandardizationConformity Assessments Function:

-Baselines: Assesses reference baselines-Assessment: Performs surprise reviews (!EB) of some accreditations, initial

inspections and audits.-Recognition: Recognizes accreditor and performs oversight of accreditor

Accredits assessment personnel according to standards-Prototype Evaluation: Establishes standards for innovative projects.

! EB = surprise audit by EB

Operational EntitiesAudit Divisions: Certify CERs after audits according to auditingstandards and for conformance with standardsRegistration Divisions: Perform initial inspections of standard projectsaccording to standards and for conformance with standards

ProjectsImplement, monitor, measure andreport according to standards

Assessment PersonnelAssess projects according tostandards and for conformancewith standards

periodicreaccreditation

Host Country CDM Office Develop baselines Assess project sustainability Approve or reject projects

Note: liability of participants isanother means of ensuringsystem integrity. Accreditors areliable for accreditation,operational entities are liable fortheir assessments, and projectdevelopers and operators areliable for their projects.Contractual agreements andengagement letters should clearlydefine each party’sresponsibilities and duty of care.

(Assesses project sustainability)

Periodicreaccreditation

+!EB

1 Worldwide AccreditorAccredits Operational Entities according to standards for both the

registration and audit functionsAccredits assessment personnel according to standardsPerforms ongoing surveillance of OEs


Exhibit III.5CDM System Integrity

(Regional Accreditor(+) Model)

3-5 Regional Accreditation Agencies-Accredit Registration Operational Entities according to

standards-Accredit Audit Operational Entities according to standards-Accredit assessment personnel according to standards-Perform ongoing surveillance of OEs

! EB = surprise audit by EB

Audit Operational EntitiesCertify CERs after auditsaccording to auditing standardsand for conformance withstandards

ProjectsImplement, monitor, measure andreport according to standards

Routine peer review+

!EB

Initial InspectionOperational Entities

Perform initial inspections ofstandard projects accordingto standards and forconformance with standards

Assessment PersonnelAssess projects according tostandards and forconformance with standards

Routine peer review& reaccreditation

+!EB

periodicreaccreditation

Host Country CDM Office Develop baselines Assess project sustainability Approve or reject projects

Note: liability of participantsis another means of ensuringsystem integrity. Accreditorsare liable for accreditation,operational entities are liablefor their assessments, andproject developers andoperators are liable for theirprojects.Contractual agreements andengagement letters shouldclearly define each party’sresponsibilities and duty ofcare.

Executive BoardStandards Function: Ensures StandardizationConformity Assessments Function: Coordinates peer reviews among accreditors

Baselines: Assesses baselinesAssessments: Performs surprise reviews (!EB) of some accreditations, initial

inspections and audits.Recognition: Recognizes accreditors, performs oversight of accreditorsPrototype Evaluation: Establishes standards for innovative projects

(Assesses project sustainability)

Routine peer review& reaccreditation

+!EB


Within the scheme, each entity is held liable for their specific actions and those aspects that are undertheir control. Clear assignment of liability is important for the integrity of the CA system, as isspecification of what constitutes appropriate action. For example, the OE’s duty of care and the extent ofreasonable assurance they must provide, both of which determine their liability for fraud or negligence inthe initial inspection, should be clearly defined by contracts and engagement letters – such contracts andengagement letters should probably be standardized for CDM.

It should be recognized that conformity assessment does not act as a guarantee of the CERs.Registrations would attest to a project’s capability to produce CERs, given that everything the assessorsevaluate in an Initial Inspection is true and accurate. More importantly, Certifications would attest to thefact that the auditors performed due diligence in auditing the project reports. The certifications wouldprovide confidence (or “reasonable assurance”) – not a guarantee – that the reports are true and accurate.Auditors provide reasonable assurance that the project’s claims are free of fraud and error, but it would bevirtually impossible for auditors to do more than review the data provided to them and sample theevidence.

In this paper, we do not address other measures that might be appropriate for further assuring theintegrity of the CERs themselves. For example, under what circumstances are CERs “decertified,”otherwise declared invalid, or reduced in value? There are options for minimizing the impact of thisoccurrence. For example, project developers might be required to post a bond that would allow thepurchase of CERs to replace those that were decertified. Alternatively, project developers could berequired to reserve a percentage of the CERs in escrow until the end of the project (or for some period oftime) to minimize the impact of a decertification – these escrowed CERs could be used at the end of theproject. The procedures and policies for invalidating CERs and measures for minimizing the impact ofthis occurrence should be established at the outset of the CDM program.

III.8. COMPARISON OF CONFORMITY ASSESSMENT WITH CDM REQUIREMENTS

There are a number of similarities and differences between the characteristics of a conformityassessment system for CDM and the characteristics of existing conformity assessment (CA) systems. It isthe similarities that provide a basis for profitably learning from the experience of existing CA systems andbuilding upon their standards, processes and institutions. However, there are important differences thatprevent wholesale adoption of existing CA practices. These similarities and differences should beunderstood when designing the conformity assessment system for CDM.

Similarities Between CDM and Existing CA Systems

Both systems aim to allow products produced in different countries to be accepted internationally byvirtue of a system that ensures product uniformity.

Product uniformity is certified by assessors who verify that product are produced in conformancewith international standards.

The assessors themselves are shown to be equivalent by virtue of equivalent accreditations andpossibly also by peer review of assessment organizations.

The accreditors are shown to be equivalent by virtue of recognition by an authoritative body andpossibly also by peer review.

Both systems provide for initial inspections that ensure that a process design (or project plan) isstructured in a manner that could produce products that conform to standards.


Both systems provide for audits that ensure that products have been produced according to standards.

Both systems strive for efficiency, integrity, transparency and accountability.

Differences Between CDM and Existing CA Systems

Conformity Assessment for CDM does not cleanly fit into either a normal product conformityassessment scheme nor a process conformity assessment scheme. In regular CA, both products andprocesses can be assessed for conformity to standards. Process assessments however, (e.g., ISO 9000 and14000) do not say anything about the validity of the products generated by the process; they basicallyaffirm that the organization is being managed according to sound management or environmentalprinciples and is showing continuous improvement. Under CDM, the CERs are products, but since theyare constructs (emissions that “didn’t happen”) there is no real way to test them directly. The proceduresused to assess CDM likely need to be some cross between product and process CA. Moreover, once theproduct is certified (i.e., once CERs are granted) it becomes much more difficult for end-users to assessits validity, since the end-users cannot judge for themselves whether the product “works.”

In CDM, the supplier (project operator and host country) and the purchaser (project developer) areboth involved in creating the product and both have incentive and opportunity to collude and cheat.

Institutional concerns in CDM will necessarily be more politicized than in normal CA, fromstandardization through assessment.

Factors that are indirectly related to the project and beyond the control of the project may affectassessment results:

1. Leakage – whether there are countervailing project impacts beyond the project boundary. Forexample, a forestry project that protects a specific forest tract from conversion to agricultural landmay induce local farmers to simply convert a neighboring tract, thereby negating any projectbenefits.

2. Baselines – the reference case against which project impacts are judged. Baselines may beestablished on a project-by-project basis or on a more standardized basis.

3. Dynamic baselines – whether or not the reference scenario changes during the project lifetime.

4. Additionality – whether the reduced, avoided or sequestered emissions claimed by the projectwould have happened anyway in the absence of CDM.

5. The benefits must be shown to be long-term. Even though the “currency” of the CDM is CERs, itis possible that their validity may need to be shown to be valid for periods beyond the length ofan audit time frame.

Although participation in CDM is voluntary, the standards must be mandatory and regulated.

The expertise and authority needed to perform initial inspections versus that needed to perform auditsdiffers much more greatly in CDM than in normal CA.


APPENDIX A. EXISTING CONFORMITY ASSESSMENT ORGANIZATIONS &INSTITUTIONAL ARRANGEMENTS

nvironomicsAppendix A, Page 1 ENovember, 1999

APPENDIX AEXISTING CONFORMITY ASSESSMENT ORGANIZATIONS

& INSTITUTIONAL ARRANGEMENTS

A.I. INTRODUCTION

The Kyoto Protocol provides the international community the opportunity to cooperate to achievereductions in greenhouse gas (GHG) emissions quickly and efficiently through “flexibility mechanisms.”One of these mechanisms is the Clean Development Mechanism (CDM) which allows industrializedcountries to obtain credits (certified emission reductions - CERs) for funding GHG reduction projects indeveloping countries. Key to the success of the CDM will be the establishment of effective, credible andefficient external verification institutions, processes and requirements.

Fortunately, there is already substantial experience in international commerce regarding howexternal verification can be successfully organized and performed. As described in the main body of thisreport, existing external verification institutions and processes are described in terms of standards thatestablish specifications, and conformity assessment activities for recognition, accreditation, auditing andcertification functions. Defining, designing and creating the necessary institutions and procedures forCDM to perform these functions need not reinvent the wheel. The verification functions and bodies thatare likely to be needed for a smoothly operating CDM are similar to conformity assessment processes andstandardization activities that are now employed worldwide. Although some aspects of CDM are unique,there is much to be learned from how existing conformity assessment and standardization activities areorganized and how these functions are performed. Nonetheless, because key aspects of CDM are unique,it is important that the conformity assessment system for CDM reflect these needs.

A.I.1. Purpose

This appendix presents an overview of existing conformity assessment and standardization entitiesand practices, how they are organized, and their potential use within the context of CDM.

A.I.2. Summary of Results

Existing international conformity assessment systems arose out of a need to assure buyers thatproducts manufactured abroad will suit their needs, thereby facilitating international trade. The details ofthe different conformity assessment schemes vary widely, reflecting the specifics of the purpose of thesystems, the nature of the products, previous historical arrangements, and the countries involved.Regardless of the details, one way or another, each system has standards functions, accreditationfunctions and certification functions. There are two especially important distinctions from a CDMperspective with regard to the accreditation function:

• Geographic Scope. Some conformity assessment schemes have a single accreditation bodythat fulfills this function on a worldwide basis. Other conformity assessment schemes rely onan accreditation body in each of the participating nations to accredit auditors within thosenations. As discussed in the main body of this report we think that most effective and reliableaccreditation system for the initial stage of CDM would be either a single accreditor thatserves on a worldwide basis or a few accreditors that serve on a regional basis. Once CDM


advances to later stages, the option would remain, if appropriate, to transition from aworldwide (or regional) accreditation system to a national accreditation system.

• Activities of the Accreditation Body. In conformity assessment schemes, the accreditationbody is not only responsible for the initial accreditation (and periodic reaccreditation), butalso for ongoing oversight of the certification bodies. This would include accompanying andshadowing operational entities on selected audits. In some conformity assessment schemes,the accreditation body relies upon other processes to provide the ongoing oversight, such asby requiring periodic peer review among certification bodies. From a CDM designperspective, it is important to ensure that the responsibility for ongoing oversight and theapproach used to achieve it is explicit and clear.

With regard to existing organizations, there are a number of well-regarded standardization andconformity assessment organizations. Ideally these established organizations would meet the needs ofCDM standardization and conformity assessment perfectly. Unfortunately, none of the organizationsoffer a perfect fit. Some institutions simply do not cover a sufficiently broad spectrum of topics for thepurposed of CDM. Some institutions have very wide representation in their decision-making bodies, yetwould not be sufficiently representative of CDM stakeholders. Despite the imperfect fit, we conclude thatexisting institutions and the expertise they offer could and should be utilized as much as possible.

With regard to existing standards, existing standards for accreditation, auditing, monitoring andperhaps for estimating GHG reduction can be used as a starting point for CDM-specific standards.

Finally, is should be noted that the most appropriate conformity assessment scheme for CDMmay not be appropriate for the other flexibility mechanisms. For example, as discussed in the main bodyof the report, while we believe that worldwide accreditation is an appropriate model for CDM, nationalaccreditation may be more appropriate for emissions trading among Annex 1 nations. The conformityassessment systems across different flexibility mechanisms need not be identical. However, whendesigning a CDM conformity assessment system, some consideration should be given to the extent towhich the conformity assessment systems for the various flexibility mechanisms should be compatibleand comparable. For example, it seems especially appropriate that the same standards apply to allflexibility mechanisms, although the institutional arrangements for achieving these standards might bedifferent.

This appendix is organized as follows:

Section A.II Overview of Existing Standardization and Conformity Assessment Institutions,provides an introduction to existing institutions, how they operate, and theapplicability of their approaches to CDM.

Section A.III Organizing Standardization and Conformity Assessment Functions, describesvarious ways these functions are currently organized in existing standardizationand conformity assessment regimes, and their applicability for CDM. We firstdiscuss schemes with accreditors that serve worldwide and then describe schemeswith national accreditors.

Section A.IV Description of Some Existing Institutions, provides additional detail regardingsome of the key existing standardization and conformity assessment institutions.


A.II. OVERVIEW: STANDARDS & CONFORMITY ASSESSEMENT INSTITUTIONS

In any type of market, buyers require some assurance that the products they purchase will suittheir needs – this is the fundamental premise underlying all standardization and conformity assessmentactivities. Obviously, buyers’ “needs” represent an extremely wide range of product attributes including aproduct’s ability to perform its designated function, integrate with other products (and hence thesubstitutability of one manufacturers’ product for another’s), and perform its function for a reasonabletime period. In most marketplaces, “caveat emptor” is not adequate protection of buyers’ rights, and thusvarious systems of guarantees have developed, ranging from the most basic – a product warrantee, to ahighly complex system of standardization and conformity assessment:

Standardization. The bedrock of product assurance systems are standards. A standard is aspecification of the design or performance attributes of a product or process. The NationalStandards Policy Advisory Committee defined standards as a “prescribed set of rules, conditions,or requirements concerning definitions of terms; classification of components; specification ofmaterials, performance, or operations; delineation of procedures; or measurement of quantity andquality in describing materials, products, systems, services, or practices.”1 Standards can beclassified by purpose, e.g., product standards or process standards; by user, e.g., a nationalstandard or company standard; or by type of requirement, e.g., design standards or performancestandards.

Conformity Assessment. Conformity assessment (CA) is “any activity concerned withdetermining directly or indirectly that relevant requirements are fulfilled”. According to theNational Institute of Standards and Technology (NIST), conformity assessment includes:“sampling and testing; inspection; certification; and quality and environmental system assessmentand registration [as well as]. . . accreditation of the competence of those activities by a third partyand recognition (usually by a government agency) of an accreditation program's capability.”2

One of the basic premises of conformity assessment activities is that they guarantee equivalenceof products and processes. In other words, all products certified as being in conformity with astandard are presumed to have equivalent qualities with respect to that standard; all auditors whocertify a product are presumed to use equivalently stringent and thorough procedures; all auditorsaccredited to certify a product are presumed to have undergone equivalently thorough training,etc..

If the implementation of the Kyoto Protocol is to be both effective and protective of theenvironment, then each product created ( i.e., each offset) must be real and “additional;” must be fungiblewith offsets created in different circumstances; and must be guaranteed to be valid (real and additional)for specific time periods. To ensure these product requirements, the market for greenhouse gas emissionreduction offsets (CERs) cannot rely solely on product warranties for “deficient” offsets, but rather mustrely on a sophisticated system of linkages and interactions among standardization and conformityassessment institutions. Such arrangements are already well established in international commerce, andthey provide a good starting point for thinking about how to structure these functions for CDM.

This section outlines the various facets of existing standardization and conformity assessmentsystems, and describes their relevance to CDM.

1 National Policy on Standards for the United States and a Recommended Implementation Plan, National StandardsPolicy Advisory Committee, Washington, D.C., December, 1978. P.6. (As quoted in Breitenberg, 1987.)2 Breitenberg, M., 1997a.


A.II.1. Standardization

The following describes the types of standards likely to be needed for CDM, and existingstandards organizations and their applicability to CDM.

Types of Standards Likely to be Needed for CDM

As might be imagined, for CDM to function properly several types of standards will likely benecessary:

• Product standards would normally be in order for products that are to be bought and sold onthe international markets and which have high economic and environmental value. Howeversince offsets are not “true” products,3 the standards must focus on how the offsets are created,measured and verified.

• Product standards are likely to be necessary however, for the equipment used to mitigate ormeasure pollution. These product standards can be either design standards or performancestandards.

• Process standards are more likely to be integral to CDM. Process standards may need tobe developed for:

- methods of mitigating emissions -- especially for forestry projects whichgenerally rely on silvicultural practices as opposed to the engineering solutionsused for energy projects,

- methods of measuring the performance of the mitigation methods, and

- methods of verifying the performance of the projects. (Note that measurementand verification are separate activities.)

• Company standards may be developed by certain investors with requirements which maydiffer from national or international requirements.

• National standards are likely to be developed so that the sovereignty of each host nation ispreserved and so that the legal requirements of host and investor countries are safeguarded. Thedifference in national standards may be most noticeable with respect to the sustainabledevelopment priorities of each host nation.

• International standards have already begun to take shape in the form of specifications by theInternational Panel on Climate Change (IPCC). The Kyoto Protocol also calls for internationalstandards for conformity assessment of CDM projects.

3 Countless products that are traded internationally and which are of great significance to health and safety rely onsimilar systems of standards and conformity assessment. However, unlike most other products of this ilk, emissionoffsets of any kind are unique in that they are not real products, but constructs. The items sold and purchased havevalue for representing events that didn’t occur or items that weren’t created (i.e., the emissions that “weren’t”). Thatstandards and conformity assessment procedures must be written and designed for these “non-products” presents afurther challenge for those designing and implementing these systems.


Existing Standards Development Organizations and Their Applicability to CDM

Standards are developed at many levels. There include:

• company standards intended solely for the internal use of one corporation and developed bythe corporation itself;

• industry standards, usually developed by trade associations or professional associations;

• national standards for products or groups of products are often developed by a nationalgovernmental body or in some countries by a non-governmental body; and

• international standards that are developed by international or regional standardizing bodiesthat aim to harmonize standardization and facilitate international trade.

In the United States there are literally hundreds of organizations that develop and promulgatestandards. Among the most prominent private standards organizations are the American Society ofMechanical Engineering (ASME) and the American Society for Testing and Materials (ASTM). TheAmerican National Standards Institute (ANSI) is also a private organization and is responsible forcoordinating voluntary (non-regulatory) standards in the U.S. ANSI is also the lead organizationrepresenting the U.S. in international standardization organizations. The National Institute of Standardsand Technology (NIST) is a branch of the U.S. Department of Commerce and is the lead agency forgovernmental or regulatory standards.

Internationally, the International Organization for Standardization (ISO) is by far the mostimportant standardizing organization, with members from over 130 countries. ISO promulgates standardsin all fields except electrical and electronic engineering. Standards for electrical and electronicengineering are developed by the International Electrotechnical Commission (IEC). The IEC is secondonly to ISO in terms of importance in the international standards arena. In addition to ISO and IEC thereare several regional standardizing organizations, such as the Asean Consultative Committee ForStandardization And Quality (ACCSQ), the European Committee for Standardization (CEN), theEuropean Committee for Electrotechnical Standardization (CENELEC), the Pacific Area StandardsCongress (PASC), and others. Finally, a relatively new organization, the Forest Stewardship Council(FSC), acts as both an international standardizing body and as an international accreditation organizationfor forestry certification groups.

Section A.IV of this appendix reviews some of the basic aspects of ISO, IEC and FSCstandardization, and discusses the relevance of these institutions and their standards for the CDM. ISOhas been particularly involved in climate change discussions, having had several meetings withrepresentatives from the UNFCCC to discuss roles that ISO might potentially play. FSC has accreditedseveral organizations that are currently certifying the sustainability of forests in AIJ projects. Despite thelure and the advantages of utilizing existing organizations for CDM and other Kyoto Protocolmechanisms, our review finds that no organization offers a perfect fit for the needs of an internationalCDM standardization / conformity assessment body. In particular, the membership of ISO may be ofconcern for some developing countries hoping to host CDM projects, as well as for some environmentalnot-for-profit organizations or advocacy groups with different views from the industry-driven ISOmembership.


Despite the imperfect fit, existing institutions and the expertise they offer could and should beutilized as much as possible. For example, while it may be inappropriate and cumbersome to ask ISO todevelop standards specifically for CDM, ISO standards such as the ISO 14000 series on environmentalmanagement might serve as a starting point for developing CDM process standards. ISO/ IEC guides onaccreditation and auditing, as well as FSC procedures for forest audits might likewise be used as a basisfor CDM procedures. Where available, ISO and IEC product standards for equipment used in measuringand mitigating pollution could be applied. On the national level, it is easier and desirable to use existinginstitutions for standardization and conformity assessment. For example, the expertise of ANSI and NISTcould be called upon to help the U.S. formulate inputs on CDM standards.

A.II.2. Conformity Assessment

The following provides an overview of the auditing, accreditation, recognition, and oversightcomponents of conformity assessment for CDM.

Auditing and Auditors4

The following describes the type different types of audits, audit standards, audit organizationsthat will likely be involved in CDM, and special considerations regarding audits for CDM.

Types of Audits

There are three types of audits:

• 1st party or self-audit in which a manufacturer declares his products or processesto be in conformance with a standard;

• 2nd party audit in which the consumer audits the supplier for conformance; and

• 3rd party audit in which an independent body audits the supplier.

Most markets do not place much credibility in 1st party audits as there is both incentive and facility tomisrepresent facts. 2nd party audits are somewhat more common, though they are inefficient if a supplierhas many customers and each requires an audit. Further, 2nd party audits are of less value to CDMprojects since both the consumer (investor) and supplier (host) have incentives to cheat. 3rd party auditsare considered the most reliable and efficient form of auditing and are the most applicable to CDMprojects. For the most part, current 3rd party auditing is privatized.

Audit Standards

ISO has published standards that auditors are expected to follow for auditing, auditorqualifications and management of auditing programs, as well as guidelines, rules and requirements forthird party certification. Further, within ISO 14000 there are three auditing documents specific toenvironmental management systems. One of these, ISO 14010 defines the general principles ofenvironmental auditing. The other two, ISO 14011 and 14012 define the audit procedures and thequalifications of auditors. There are similar documents that cover the qualifications and operatingprocedures for laboratories and testing facilities, as well as documents that cover the terminology ofconformity assessment and auditing. The general rationale behind all of these publications is that 4 The terms “auditor,” “registrar,” and “notified body” are virtually synonymous and refer to organizations thatverify a product’s (or process’) conformance to a standard.


standards themselves are meaningless if the institutions through which they are measured and reported arenot equivalent.

Audit Organizations Likely to be Involved in CDM

There are a number of private auditing organizations already in existence that are likely to beeligible to be auditors of CDM projects, should the final CDM structure allow it. For example, theseinclude the organizations already accredited by the FSC such as Smart Wood, which has expressedinterest in auditing for carbon sequestration,5 and SGS Forestry, which has been contracted to audit theforestry operations of one of the largest CDM projects to date (the Protected Area Project in Costa Rica).6SGS, one of the largest and oldest firms in the independent inspection industry, also certifies ISO 9000and 14000 conformance. It would be surprising if SGS did not play a role in auditing CDM projects. Asanother example, KEMA is also ISO 14000 registrar and is already involved in the verification of CDMprojects in the energy sector. Other examples of international companies that may be poised to beauditors include Lloyd’s Register, Factory Mutual, TUV Rheinland, and Underwriters Laboratories,among others. Energy service companies (ESCOs) play an increasingly important role both in the U.S.and abroad in tracking the performance of DSM energy efficiency projects, and, given time to develop theadditional relevant expertise necessary, might also be potential entrants into the CDM auditing arena. Inshort, the number of prospective auditors of CDM projects is very high, and increases the ease with whichthe audit stage of verification could be privatized. The high number of auditors also increases the needfor equivalent standards among them.

Auditing CDM Projects

The principle of equivalence in the auditing process can be directly applied to CDM projects.Regardless of the body or bodies chosen by the COP to promulgate standards for CDM projects, therewill probably be numerous bodies that actually perform audits. At a minimum, governments themselvesmight audit the CDM projects they host and so the number of possible auditors would be equal to thenumber of host nations.7 However, the audit stage of conformity assessment is the most amenable todecentralization and privatization. The number of auditors, certainly in nations with developed, freemarket economies, is likely to be very large and these auditors can potentially serve on an internationalbasis. A proliferation of auditors without equivalence in auditing procedures can cause a multitude ofproblems for the smooth functioning of a CDM system. For example, some auditors might be more laxthan others; auditors of energy projects might generally interpret standards very differently from auditorsof forestry projects; some auditors might have far less expertise than others; etc.. These problemsmultiply several-fold in an international arena. Differences in translations of standards, cultural attitudestowards standardization and regulation, developmental stages of a region’s economy, and a host of otherfactors can render a conformity assessment scheme virtually meaningless. As such, it is of utmostimportance for auditors to meet equivalent standards.

The Kyoto Protocol specifies that CDM projects and the CERs that are their products will besubject to “independent auditing and verification.” The COP is left to define what is meant by these 5 Donovan,R., 1997b.6 SGS’ audit of the Costa Rica Protected Area Project is very interesting in that its scope covers virtually all of thestages and levels of intensity of auditing that are described in this report, though SGS is a private firm. WE haveargued that the suitability of a project and the assessment of its methodological approach are tasks best handled bycentralized bodies. We believe that the proliferation of CDM projects and the need for fungible offsets willnecessitate a strict equivalence in these broader conformity assessment issues, which cannot be produced by adecentralized system.7 Government audits are problematic in the context of CDM because they may be considered 1st or 2nd party auditorseven if not directly involved in a project.


terms and what institutional structures the terms imply. However, in UNFCCC workshop reports thatwere published in 1998 in conjunction with the Buenos Aires conference (after the Kyoto conference),reference is made to “accredited” certification bodies. Auditing without accreditation is not much betterthan 1st party certifications -- there is little to bolster the claims of the producer. This is especially true ina system without ‘real” products and in which the validity of any given CER will be difficult, if notimpossible, to assess.

Accreditation and Recognition

Setting and maintaining equivalence standards for auditing and auditors is done via accreditation.Recognition is an action undertaken by an entity with regulatory or statutory authority to appoint anotherentity as officially responsible for accreditation of auditors within a given field. The following discussesaccreditation in the U.S., international accreditation and recognition, and accreditation for CDM auditors.

Accreditation in the U.S.

In the U.S. the premier accreditor of auditors of voluntary standards is the American NationalStandards Institute (ANSI); the National Institute of Standards and Technology (NIST) has accreditationauthority for auditors of regulatory standards. Together with the Registrar Accreditation Board (RAB),ANSI also administers accreditation of ISO 9000 and ISO 14000 auditors. According to NIST,8 there areapproximately twenty private sector organizations and 13 federal government programs that accreditproduct certifiers. This does not include the accreditors 48 private sector laboratory accreditationprograms nor the 31 federal government accreditation programs that exist. To accord some centralstructure to accreditation of labs, product conformity schemes and quality management programs withinthe U.S., NIST administers the National Voluntary Conformity Assessment Systems Evaluation program(NVCASE). NVCASE recognizes accreditation programs in a number of fields. Applicants’ programsare reviewed according to international standards and criteria. Participants in NVCASE undergo a peerreview from experts and other accredited bodies. Moreover, if no accreditation body exists in a particularfield, NVCASE will perform the accreditation tasks.

International Accreditation & Recognition

Existing international conformity assessment systems arose out of a need to assure buyers thatproducts manufactured abroad will suit their needs, thereby facilitating international trade. The details ofthe different conformity assessment schemes vary widely, reflecting the specifics of the purpose of thesystems, the nature of the products, previous historical arrangements, and the countries involved.Regardless of the details, one way or another, each system has standards bodies, accreditation bodies andcertification bodies. There are two especially important distinctions from a CDM perspective with regardto the accreditation function:

• Geographic Scope. Some conformity assessment schemes have a single accreditation bodythat fulfills this function on a worldwide basis. Other conformity assessment schemes rely onan accreditation body in each of the participating nations to accredit auditors within thosenations. As discussed in the main body of this report we think that most effective and reliableaccreditation system for the initial stage of CDM would be either a single accreditor thatserves on a worldwide basis or a few accreditors that serve on a regional basis. Once CDMadvances to later stages, the option would remain, if appropriate, to transition from aworldwide (or regional) accreditation system to a national accreditation system.

8 Toth, R.B., 1997.


• Activities of the Accreditation Body. In conformity assessment schemes, the accreditationbody is not only responsible for the initial accreditation (and periodic reaccreditation), butalso for ongoing oversight of the certification bodies. This would include accompanying andshadowing operational entities on selected audits. In some conformity assessment schemes,the accreditation body relies upon periodic peer review among certification bodies to providethe ongoing oversight. From a CDM design perspective, it is important to ensure that theresponsibility for ongoing oversight and the approach used to achieve it is explicit and clear.

There are a number of existing structural mechanisms for accreditation including establishment of acentral, international accreditation authority, establishment of a federation of accreditors, peer review ofauditing or certification bodies, or a multilateral agreement that encompasses a variety of conformityassessment aspects. These are discussed in the next section (A.III) of this appendix.

Oversight Organization

Some conformity assessment schemes are administered by a central organization. The oversightorganization may include a wide variety of responsibilities including: writing the standards, appointingnational bodies to certify conformity with the standards, performing some form of accreditation of theauditors, providing ongoing oversight of auditors, and maintaining a registry of products audited, auditorsaccredited and accreditors recognized. Oversight organizations of note in current conformity assessmentschemes are the IEC and the FSC.

The IEC administers three conformity assessment schemes: the CB scheme for recognition of testresults of electrical equipment; the IECEx scheme for electrical equipment in explosive atmospheres; andthe IECQ scheme for quality assessment of electronic components. The three are essentially alike in thatthe bulk of the standards against which products are tested are produced by the IEC, and that the threeschemes are administered by the IEC’s Conformity Assessment Board (CAB). Moreover, all threeschemes operate on the same principle that test results to the same standard are equivalent regardless ofthe product’s point of origin.

The FSC acts as an oversight organization by: producing principles and criteria of sustainableforestry (which are in some sense standards); accrediting organizations that will audit according to FSCcriteria; and by maintaining a registry of FSC accredited auditors and of forests and forests productscertified by FSC accredited auditors.

Both the IEC and the FSC are discussed further in the next section of this appendix.


A.III. ORGANIZING STANDARDIZATION and CONFORMITY ASSESSMENT

One of the ironies of the development of standards internationally has been their use as technicalbarriers to trade. Ostensibly, standards are developed with the intention of liberalizing trade, but over timethey increasingly were used as barriers to entry by international competitors. Some countries do notaccept the product certificates or quality system registrations of other countries’ auditors even if they arebased on identical standards; some countries do not accept the test results of other countries’ laboratoriesdespite equivalent methodology and calibration; some countries only recognize their own accreditations.The cumulative effect of the lack of international acceptance of certificates of conformity was to forcecompanies to obtain multiple registrations and certificates of conformity for their products or systems.The 1994 GATT agreement recognized this problem. GATT’s Technical Barriers to Trade agreementrequired that conformity assessment schemes be created and implemented in a manner that does notimpose obstacles to the entry of products originating in other countries.

There are numerous international conformity assessment systems. The details of the differentconformity assessment schemes very widely, reflecting the specifics of the purpose of the systems, thenature of the products, previous historical arrangements, and the countries involved. However, from aCDM perspective, it is useful to divide them into two categories: those that rely on a limited number ofaccreditors that operate worldwide or regionally and those that rely on each participating nation toprovide its own accreditation services. Within each of these categories, different institutionalarrangements are used, as shown in the Table 1 below:

Table A-1. Approaches for Organizing Standards and Conformity Assessment Activity

MODEL TYPE EXAMPLE

Worldwide Accreditation Single Organization For Oversight & Accreditation FSC

Federation of Accreditors IAF

Oversight Organization + Federation of Auditors IEC National Accreditation

MRA / MLA* ISO

*Mutual Recognition Agreement / Multilateral Recognition Agreement

Each of these basic approaches is discussed below. As a backdrop, we note some importantconsiderations regarding accreditation, which were discussed in greater detail in Section II of the mainbody of the paper, that are especially important to keep in mind when considering alternatives for CDM:

• Accreditors Must Maintain A Critical Mass of Competence. Regardless of how manyaccreditors there are, each must have and be able to maintain the necessary staff expertise toperform this function. At least in the initial stages of CDM, it does not seem likely that manyhost countries will have the necessary expertise to staff their own accreditation bodies.Moreover, as discussed next, it does not seem likely that many host countries would havesufficient CDM activity for national accreditors to maintain a critical mass of competence.


• Accreditors Must Be Financially Independent Of Operational Entities (OEs). ForAccreditors whose financial health is dependent on revenues they generate from providingaccreditation services, each must have a sufficient “business base” so that decisions regardingaccreditation for a specific OE are not influenced by financial concerns. At least in the initialstages of CDM, and perhaps even in later stages of CDM, it does not seem likely that therewould be a sufficient number of projects in most host countries or a sufficient number of OEsin most host countries for this type of independence.

• Accreditors Should Have Enough Accreditation Activity To Maintain/Enhance Competence.The more experience that an accreditor can obtain, the better job the accreditor is likely toperform. The more accreditors there, the less this can occur.

A.III.1. Worldwide Accreditation Model

One mechanism that facilitates the international acceptance of certifications is the establishmentof a central, international accreditation body as shown in the figure below. Under a single internationalbody, auditors world-wide are accredited according to the same standard. Nations accept either the testresults or the certificates of conformity of products certified by any auditor accredited by the governingbody.

Figure A-1 Worldwide Accreditor Model

Examples of programs that are based on worldwide accreditation include:

• The Forest Stewardship Council’s (FSC) mission is to promote environmentally appropriate,socially beneficial and ecologically viable management of the world’s forests. The FSCdevelops standards and trains and accredits organizations to audit according to FSC principlesand criteria. Purchasers of wood products in many countries will only accept wood that hasbeen certified by an FSC accredited auditor. The FSC is further described in Section IV ofthis Appendix.

• The Council on Economic Priorities Accreditation Agency (CEPAA) was founded to addressconcerns about labor conditions around the world by encouraging adherence to voluntarycorporate social responsibility standards. CEPAA develops standards, including SA8000which delineates basic human rights principles regarding child labor, forced labor, health andsafety, compensation, working hours, discrimination, discipline, free association and


collective bargaining, and management systems. CEPAA also accredits certification bodiesthat wish to perform SA8000 audits.

• The International Organic Agriculture Movements (IFOAM) established a program toprovide consumers globally with an easily identifiable mark on certified organic products.Organic certification is available for crop production, processing, livestock, wild products,input manufacturing, retailing, and certification transference. The International OrganicAccreditation Service, Inc. (IOAS) manages IFOAM’s accreditation program under alicensing agreement with IFOAM.

While all of these examples are for non-regulatory programs, there is no reason why an internationalregulatory program could not adopt a worldwide accreditation model, or a regional accreditation model.For such models, the boards for the accreditors could include representatives from host nations.

A.III.2. National Accreditation Model

There are several different approaches that have been used to allow nations to accredit certificationbodies that operate within their borders while still ensuring international acceptance. These include afederation of accreditors, a federation of accreditors with a single oversight body, multilateral or mutualrecognition agreements (MLAs and MRAs) between countries. Each of these is briefly described below.

Federation of Accreditation Bodies

One approach for national accreditation that ensures international acceptance of certificates ofconformity is the formation of a federation of accreditation bodies. Under a federation, accreditorsreceive recognition from the federation. Nations accept the test results or the certificates of conformityfrom any auditor accredited by the federation of accreditors.

Figure A-2 National Accreditor Model: Federation of Accreditors


The federation of accreditation bodies is a developing phenomenon in conformity assessment.One such organization is the International Accreditation Forum (IAF), which incorporated as a legalentity in early 1998. Members of the IAF are accreditors from different countries. Each member’saccreditation process will undergo a peer review. After a member has passed peer review, the certificatesof conformity granted by organizations accredited by that member are to be accepted by other members.More than one accrediting organization from the same country can be a member of the IAF. Currently,the IAF includes only accreditors of ISO 9000 registrars. It will eventually also include ISO 14000accreditors and product conformity accreditors. While the IAF is not officially part of ISO or IEC, QSAR-- a similar effort that was sponsored by ISO/IEC, recently suspended its activities and deferred its role toIAF. Moreover, ISO and IEC are recommending that representatives of these two organizations be on themanagement board of the IAF.

Similar efforts are underway in the realm of laboratory accreditation, though these organizationstend to encourage multilateral or mutual recognition agreements (MLAs and MRAs) of laboratoryaccreditations amongst their members, as opposed to the IAF, which serves as the conduit for the MLA.There is an international federation of laboratory accreditors, ILAC, as well as several regional laboratoryaccreditation federations. For example, the Asia Pacific Economic Cooperation (APEC) sponsorsAPLAC, while the European Community sponsors EAL.

Federation of Auditors Under the Aegis of an Oversight Organization

In this model, the oversight organization, comprised of member nations, establishes standards andmanages the conformity assessment activity. Auditors may be accredited by the oversight body, or maybe nominated by the member nations of the oversight body and accepted through an on-going peer reviewprocess by the auditors.

Figure A-3 National Accreditor Model: Federation of Auditors w/ Oversight Organization


The design of arrangements with one oversight organization is very similar to the design of amutual or multilateral recognition agreement. An agreement is made between representatives of two ormore countries to accept each other’s audited products provided some guarantee of equivalent procedures.MRAs and MLAs tend to be slightly more complicated ventures however, and are formal tradeagreements rather than agreements among members of a federation.

A federation of bodies under the aegis of an oversight organization is essentially the method usedby the IEC’s CB/ IECEE scheme, IECQ scheme, and IECEx scheme. The three are similar in that mostof the standards against which products are tested are produced by the IEC, and that the three schemes areadministered by the IEC’s Conformity Assessment Board (CAB). Members of these schemes are eithercertification bodies (or “National Certification Bodies” – NCBs) or National Authorized Institutions(NAIs -- usually private boards). NCBs accept the test results of other NCBs and then affix their ownmarks on the products. In contrast, the countries represented by the NAIs accept the test results and thecertificates or marks granted by other nations’ auditors. The integrity of testing procedures is upheld byvirtue of membership in the scheme. The oversight organization may audit the procedures of theschemes’ members and/or the members can submit to peer review. The IEC is discussed further inSection IV of this appendix.

Mutual Recognition Agreement (MRA) / Multilateral Recognition Agreement (MLA)

Mutual recognition agreements and multilateral recognition agreements are treaties betweennations. The structure of an MRA or MLA can be described as pyramidical as shown in Figure A-4. Thetop layer of the pyramid is the national body or bodies that sign the treaty. This layer comprises the

Figure A-4 National Accreditor Model: MRA / MLA


recognition bodies, i.e., the national standards body and the acceptance bodies. In MRAs to which theU.S. is party, NIST is the relevant standards body, while the acceptance bodies are those regulatoryagencies (such as the FCC or the FDA) with jurisdiction over a product or group of products. Therecognition bodies recognize the accreditation bodies, the next level on the pyramid. The accreditationbodies, in turn, accredit auditors and certification bodies. The certification bodies inspect products andprocesses (i.e., CDM projects) and affix their marks on products (i.e., offsets) that meet the necessarycriteria. Each level of the pyramid ensures the integrity and accuracy of the level immediately beneath it.

Traditionally, regulatory agencies have been reluctant to sign treaties that allow acceptance ofcertificates of conformity.9 The reluctance stems from the fear that doing so would amount torelinquishing regulatory authority to other nations’ accreditors. MRAs have gained easier acceptancewhen the nations are asked to accept test results and then have their own national bodies affix the propercertificates on the products. This issue is less relevant for CDM, since the program stems from aninternational agreement. Nevertheless, establishing MRAs and MLAs can be a long process.

A.IV. DESCRIPTION OF SOME EXISTING INSTITUTIONS

The following discussion provides additional information about selected international standardsbodies (ISO and IEC), a worldwide accreditor (FSC), and accreditation bodies in the U.S. (ANSI, NIST,NAESCO, CACLA and NVCASE).

A.IV.1. International Standards Bodies

The following describes the International Organization for Standardization (ISO) and theInternational Electrotechnical Commission (IEC), and the applicability of these institutions, theirexpertise, their standards and organizational structure for CDM.

International Organization for Standardization (ISO)

The International Organization for Standardization (ISO) is the most well established internationalstandards body. Established in 1947, ISO is a coalition of standards bodies from more than 130 countries.The American National Standards Institute (ANSI) is the U.S. representative to ISO, though ANSI canchoose to delegate some of its responsibilities to other U.S. standards organizations, such as the AmericanSociety for Testing and Materials (ASTM) and others. ISO promulgates standards in all fields exceptelectrical and electronic engineering; these are developed by the International ElectrotechnicalCommission (IEC). This section addresses the following topics regarding ISO:

- Structure of ISO,- ISO Standards Development Process,- ISO Accreditation,- ISO Relevance to GHG Mitigation and CDM,- Potential Use of ISO 14000 Standards, and- Potential Use of ISO Test Methods for Energy Efficiency

9 Breitenberg, M., 1997b.


Structure of ISO

The ISO structure comprises several branches and divisions including:

• The General Assembly -- the voting body, made up of ISO members;

• The Council whose eighteen members and principal officers govern ISO, appoint theTreasurer, the Chairmen of the Policy Development Committees and the 12 members of theTechnical Management Board;

• The Central Secretariat serves as ISO’s executive committee and supports thefunctioning of the General Assembly, the Council, the Policy Development Committees andthe Technical Management Board;

• The Technical Management Board supervises the technical work of ISO, including the

-Technical Committees – entities that actually develop the standards and the

- Technical Advisory Groups – entities that advise the Board on planning issuesand new work; and

• The Policy Development Committees, two of which that are especially relevant to CDM are:

- Committee on Conformity Assessment, which prepares standards and guides onconformity assessment and promotes mutual recognition of conformityassessment systems, and the

- Committee on Developing Country Matters.

ISO Standards Development Process

The development and promulgation of an ISO standard are rather involved procedures, consistingof six stages:

1. Proposal -- determination of the need for an international standard;

2. Preparation -- drafting the standard;

3. Committee -- technical committee voting and submittal as a Draft International Standard;

4. Inquiry – review of the DIS by all ISO members for five months. If two-thirds of themembers approve and no more than one-quarter of the votes cast are negative, the DIS


becomes a Final Draft International Standard (FDIS). Otherwise the DIS is returned tothe technical committee;

5. Approval -- the FDIS is circulated for two months and is voted on by ISO members. Iftwo-thirds of the members approve and no more than one-quarter of the votes cast arenegative the FDIS is approved as an International Standard.

6. Publication.

Generally, an industry group within one nation communicates its desire for a standard to thatnation’s primary standards body, which in turn, asks ISO to develop a standard. The standards aredeveloped by consensus of “manufacturers, vendors and users, consumer groups, testing laboratories,governments, engineering professions and research organizations.”10 (Notably absent from this list ofstakeholders are not-for-profit groups, or NGOs. The environmental NGO community has expressedchagrin at being left out of the process which developed the ISO 14000 environmental managementsystem series, and the proposed guidance on its relevance to sustainable forestry.)

The ease with which a proposed standard becomes a published international standard variessignificantly with the proposal itself and depends heavily on the status and clout of the proposingmember.11 If a standard is fairly non-controversial it can have a relatively easy passage through the ISOprocess. Similarly, if the proposal stems from a country whose representative member heads a workinggroup or technical committee, it is more likely to secure an easier route. If the proposal revolves around acontentious issue, however, its route can be more difficult.

ISO Accreditation

ISO does not itself accredit any organizations to conduct certification activities, but it haspublished guidelines and rules for assessment and accreditation of certification bodies, laboratory andtesting facilities, third party certification systems, and auditing. Further, ISO supports the InternationalAccreditation Forum, a multinational effort aimed at facilitating acceptance of quality systemcertifications of other countries, based on the peer review of the national accreditation bodies.

ISO Relevance to GHG Mitigation and CDM

The following are three examples of what ISO believes to be its primary raisons d’etre12 andwhich are of particular relevance to CDM:

• Liberalization of global trade. Like any international market, the market for carbon offsetswill operate more fluidly in the absence of intentional or unintentional barriers to trade.Examples of intentional barriers include tariffs or official refusals to recognize the integrity ofa product produced elsewhere. Examples of unintentional barriers include reluctance ofbuyers to purchase a nonstandard product or inability to recognize a standard product. In thecontext of CDM offsets, since offsets are constructs rather than actual products, aninternational market would depend on fairly strict definitions of what constitutes an offset.

10 ISO web site.11 Breitenberg, M., 1997b.12 Op Cit., ISO web site


• Standards for emerging technologies. ISO sees its role in emerging technologies, includingenvironmental technologies, as one that defines terminology and accumulates quantitativeinformation. This perhaps is a clue to a weakness not just within ISO but in standardizationgenerally: the need for standard development arises when products with the same generalpurpose are not freely interchangeable due to some technical difference. If a standard ispromulgated and receives broad acceptance, it reduces the chances that technically differentproducts will be developed. In established fields, a mechanism that has the potential side-effect of discouraging innovation is less problematic, but in developing fields it could be ahindrance. If processes for the creation and measurement of carbon offsets are set in stone,innovative techniques might be stifled. (ISO does periodically review and revise itsstandards, however.) A CDM verification scheme should incorporate this consideration. Forexample, a company or an NGO may devise an innovative method of reducing GHGemissions, and may have obtained a funding commitment from investors contingent on theproject’s acceptance as a CDM project. If the CDM’s Executive Board rules that onlyprojects with standardized methodology may be approved, then the innovation will be wastedand the potential for emissions reductions lost. The options analyzed in the main body of thepaper assume that the EB will in fact perform evaluations (which we called “prototypeevaluations”) of innovative projects or methods.

• Market entry to developing countries. Developed countries are occasionally averse to buyingproducts from developing countries because they are unsure of the product quality standards.CDM is premised on developed countries buying products (i.e., offsets) from developingcountries. If there is uncertainty as to the quality of the offsets, the system will likely fail toachieve its goals. One way to help ensure confidence in the market is to establish product,process, and measurement standards.

Potential Use of ISO 14000 Standards

The ISO 14000 series of standards for environmental management systems (EMS) had beendiscussed and debated since the 1992 “Earth Summit” in Rio de Janeiro, and was published in 1996. Itsgenesis and evolution are directly attributable to the widespread acceptance of the ISO 9000 series ofstandards for quality systems. “Registration” to the ISO 14000 series is an assurance that a company (or aproject) has quality management in place for “that part of the overall management system which includesorganizational structure, planning activities, responsibilities, practices, procedures, processes andresources for developing, implementing, achieving, reviewing and maintaining”13 any actions that canaffect and improve the company’s relation to the environment.

The published portions of the ISO 14000 series include required elements of an EMS, generalprinciples of environmental auditing, specific guidance on auditing for ISO 14001 registration, guidanceon the qualifications of environmental auditors, a guide for the inclusion of environmental aspects inproduct standards, a guide to assist forestry organizations in the use of an EMS, a guide on the generalprinciples of “eco-labeling,” guides on the principles and scope of life-cycle analyses, and a glossary ofenvironmental management terms. In development are more guidelines on: environmental siteassessments, environmental performance evaluation, life cycle assessments and environmental labeling.

In the United States, ISO 14000 auditors are accredited under the joint aegis of AmericanNational Standards Institute (ANSI) and the Registrar Accreditation Board (ANSI/RAB). ANSI/RAB isa member of the International Accreditation Forum, and thus is party to a multilateral recognitionagreement (MLA) in which the accreditation organizations of different countries accept the registrations 13 Lamprecht, J.L., 1997.


of auditors accredited under each others’ systems. Auditors are required to be objective, independent, andcompetent. The audit itself must be implemented systematically and with due care. Other thanconfirmation or denial of the system’s performance as represented by registration (or lack thereof) theresults of the audit are to be confidential. The auditor and auditee must agree on the scope of the auditand on its procedures.

ISO’s Climate Technology Task Force (CCTF), which operates within the technical committeeresponsible for environmental management standards, has already started to work out the possibilities forusing the ISO 14000 series for Kyoto Protocol implementation and is in the process of meetings anddeliberations with the UNFCCC. A report prepared by CCTF presents an initial sketch of theapplicability of the ISO 14000 series to climate change issues.14 Among other things, the report discussesthe possibility of using ISO 14001 (environmental management systems) to provide a framework to trackemissions and enhance independent verification . . . by expert review teams.”15 One section of the CTTFreport notes that the measurement methodologies would need to be developed by “appropriateinternational bodies” but does not name specific organizations. Another section of the report notes thatthe ISO (draft) standard on performance evaluation could be used for CDM projects, but that internationalstandards may need to be developed in order to use relevant performance indicators. A further section ofthe report notes the potential applicability of the ISO 14041 life cycle assessment standards to GHGmitigation projects.

At first blush, the ISO 14000 series would seem a perfect tool for conformity assessment ofcarbon offsets. The standards are already developed and were developed by on a consensus basis by aninternational organization; they are generic enough to apply to many activities yet can be tailored so thatboth forestry and energy sector products could easily fit within its purview; are already beingimplemented by many corporations that are potential investors in CDM projects; involve regular auditingunder specified principles, provide an existing infrastructure of conformity assessment activities (i.e., anauditor industry, accreditation, and official recognition); and are already being considered for applicationto the Kyoto Protocol.

Both ISO 9000 and 14000 are based on the principle of Total Quality Management, which holdsthat quality systems produce quality products. Nevertheless, “the hallmark of a management standard asopposed to a technical or performance standard is that it describes a generic sound process but does notestablish or endorse any specific performance tests.16” Thus an ISO 14000 registration of a CDM projectcould not technically certify the veracity of the offsets but only the operation of the system that producedthe offset.

Perhaps assessing and certifying the system that produces offsets (and the veracity of the projectdeveloper’s claims) would be sufficient. There is, after all, no actual “product” that is created andtherefore none to be certified. The product -- a GHG offset -- is a construct and impossible to measuredirectly, and hence is measured by monitoring the processes and systems which produce it. It isquantified by inference and assumption, but is never itself measured. The activities of auditing a facilityfor ISO 14000 registration are not dissimilar to those that could be required in a CDM audit. Forexample, an auditor might determine if a forest management plan is in place and if it is meeting the goalsand objectives it has defined for itself. Or, an audit might verify that energy efficiency measures havebeen implemented and that the equipment conforms to ISO/IEC product standards.

14 ISO Technical Committee 207, Climate Technology Task Force, 1998.15 Ibid.16 Pekilis, E., 1997.


Despite the many advantages of using the ISO 14000 series, its current form is not entirelyappropriate for carbon offset measuring. The series does require metering and measuring, but ultimatelyits emphasis is on intention and effort, not on results. It serves as a tool for targeting areas forimprovement.17 While the practices of EMS auditing are similar to the practices that carbon offsetauditing might entail, the lack of product certificates may leave the offset claims somewhat hollow. Thisdeficiency perhaps will be remedied when the all the guidelines for eco-labeling, life-cycle assessmentand performance evaluation are published. The ISO 14000 standards are purposely written in generalterms so that it can have wide applications and can be tailored to many different systems. The ISO 1400series standards could readily serve as a starting point for developing CDM-specific standards.

Potential Use of ISO Test Methods for Energy Efficiency

ISO has published several standards prescribing methods to test the efficiency of appliances.These include tests methods for refrigerators, freezers, air conditioners, water heaters, clothes washers,fluorescent lamps, and incandescent lamps. Despite the existence of these international standards, there islittle harmonization in test methods from country to country.18 The lack of harmonization is perhapsattributable to the fact that there are few countries with mandatory minimum efficiency standards onappliances, and hence there is little need for an international standard to facilitate trade. A global CDMregime may amplify the need for harmonized standards for household and industrial appliances. Theenergy sector projects that involve DSM measures, as well as some that involve supply side measurescould benefit from harmonized standards. For example, if two countries had different rating systems forenergy efficiency, the same project could theoretically produce two differing estimates of energy savings(and resulting carbon offsets). Harmonization would eliminate this potential confusion.

International Electrotechnical Commission (IEC)

The IEC is ISO’s counterpart for Electrical and Electronic Engineering Standards. Though IEC wasfounded 41 years before ISO it has far fewer members --60, ten of which either are associate members(observer status) or pre-associate members. Most of the national committees are from developed nations,though all of the associate and pre-associate members are developing nations or economies-in-transition.Unlike ISO, IEC views involvement in all standardization matters as part of their mission, and hence, inaddition to developing and promulgating consensus standards, administers several conformity assessmentschemes. This section addresses the following topics regarding the IEC:

- Structure of IEC,- IEC Standards Development Process,- Potential Use of IEC Standards- IEC Conformity Assessment Schemes, and- Potential Use of the IEC Conformity Assessment Schemes for CDM.

Structure of IEC

The structure of IEC is similar to ISO:

• IEC’s Council is its legislative body, which votes on standards and which has variouscommittees to advise its decisions, including the Committee of Action. The Councilcomprises the National Committees, the IEC officers and past IEC presidents. The Councildelegates management responsibility to the Council Board and to the Executive Committee,

17 Von Zahren, W. M., 1996.18 Duffy, J., 1996.


and delegates responsibility for the main functions of IEC to the Committee of Action and theConformity Assessment Board.

- The Council Board, composed of IEC officers and 15 elected members, makes IECpolicy and decisions.

- The Executive Committee, composed of IEC officers, coordinates IEC’s central officeand implements the Council Board’s policies.

• The Committee of Action, composed of elected representatives of 15 national committees, theIEC General Secretary and a Chairman is IEC’s standardization body. The Committee ofAction delegates authority to Sector Boards, Technical Committees and Technical AdvisoryCommittees.

- The Sector Boards consist of market executives who are responsible for monitoring andmaintaining the relevance of standards to market practices.

- The four Technical Advisory Committees are responsible for coordination of differentstandards. One of these is the Advisory Committee on Environmental Aspects(and consists of 12 members).

- The actual standardization work of the IEC is done by approximately 200 TechnicalCommittees and subcommittees and approximately 700 working groups. TheTCs are composed of representatives of the National Committees.

• The Conformity Assessment Board directs IEC’s conformity assessment activities. Theseinclude the IECQ, which administers a quality assessment scheme (including a certificationprogram for photovoltaic systems), the CB Scheme for recognition of test results (sometimesreferred to as the IECEE), and the IECEx Scheme for certification for electrical equipment inexplosive atmospheres. These conformity assessment programs are discussed in more detailbelow. The Conformity Assessment Board is composed of 12 elected representatives, aChairman, one representative from each of the conformity assessment schemes, and the IECTreasurer and General Secretary.

IEC Standards Development Process

Like ISO standards, a proposed standard at IEC must pass through several stages prior topublication:

• A national committee initiates the process during the proposal stage.

• A technical committee drafts the standard during the preparatory stage.

• The draft is distributed to the national committees during the committee stage and issubject to broader review and technical revision.

• During the five-month inquiry stage, all members (regular, associate and pre-associate)are invited to vote on various drafts.


• The final draft is submitted to the national committees during a two-month approvalstage.

• If two-thirds of the participating members approve and no more than one-quarter of thevotes cast are negative, the FDIS is approved as an International Standard and published.

Potential Use of IEC Standards

There are several advantages to using the IEC and its standards for CDM verification, thoughthey relate almost exclusively to energy projects. Like ISO, the IEC is well established and its standardsare accepted internationally. The fact that its standards represent the consensus of its national committeesis also beneficial. Most helpful is that many of the products that would be employed in energy side CDMprojects are natural candidates for IEC standardization, and some may already be manufactured accordingto IEC standards.

Unfortunately, using IEC and its standards presents many of the same drawbacks as would usingISO and its standards. IEC’s membership is far less inclusive than ISO, and its national committeescomprise very specialized interests. Like ISO, the IEC is largely industry driven, which may make NGOacceptance more problematic. Finally, IEC standards would be applicable only to energy projects.

IEC Conformity Assessment Schemes

The IEC administers three conformity assessment schemes; the CB scheme for recognition of testresults of electrical equipment; the IECEx scheme for electrical equipment in explosive atmospheres; andthe IECQ scheme for quality assessment of electronic components. The three are essentially alike in thatthe bulk of the standards against which products are tested are produced by the IEC, and that the threeschemes are administered by the IEC’s Conformity Assessment Board (CAB). Moreover, all threeschemes operate on the same principle that test results to the same standard are equivalent regardless ofthe product’s point of origin. The IECQ goes one step further by allowing members to affix an IECQ sealcommon to all members. The IECEx will also eventually use a common seal.

Members of the CB/ IECEE scheme are National Certification Bodies (NCBs). The title issomewhat of a misnomer in that the certification bodies are not necessarily governmental agencies ornational standards bodies, nor are countries limited to one NCB. Rather, the NCBs can be nationalstandards bodies or simply auditors and laboratories. There are seven NCBs designated by the U.S.national committee to the IEC. NCBs accept the test results of other NCBs and then affix their ownmarks on the products. For the most part, national standards are harmonized to the IEC standards. Thereare some cases where national differences do exist. The NCBs must test the products for these nationaldifferences as well. The integrity of testing procedures is upheld by virtue of membership in the scheme.Representatives of the IEC’s Conformity Assessment Board audit the procedures of the schemes’members but there is no peer review procedure.

The IECQ is somewhat different from the CB scheme in that products and processes are awardeda common IECQ certificate. IECQ combines quality assessment with product conformity. The membersof the IECQ are National Authorized Institutions, which are designated by the national committees of theIEC. The National Authorized Institutions in turn designate National Supervising Inspectorates (NSIs) toassess manufacturers, products, distributors, and laboratories. The NSIs must undergo a peer review andbe approved by the IEC’s Inspectorate Coordination Committee, an arm of the CAB. IECQ also differsfrom the CB scheme in that standards produced by organizations other than IEC can be introduced intothe system. Finally, IECQ certificates are available at seven different levels of stringency ranging from


quality system approvals of manufacturers, distributors, and test laboratories to technology product andprocess approvals which incorporate the principles of quality management.

The IECEx scheme will eventually operate like the IECQ scheme by allowing certificationbodies, appointed by national delegates to the IEC, to issue a common certificate of conformity. Thecertificate will be based on IEC standards. The IECEx scheme is not expected to be fully operational forabout ten years. Until then, countries are expected to incorporate IEC standards as part of their nationalstandards.

A.IV.2. Forest Stewardship Council

The Forest Stewardship Council was established in 1993 by timber users and environmentalgroups from 25 countries. The goal of the FSC is to provide one trustworthy, internationally recognizedproduct label that guarantees to consumers that the wood they purchase was harvested from sustainablymanaged lands. The impetus for the FSC’s creation was the fear, by NGOs, of proliferation of fallaciouscertificates or seals claiming that wood products were harvested from sustainably managed forests. FSCpromulgates principles and criteria for sustainable forestry and trains and accredits organizations tocertify that forest tracts are managed sustainably, and that forest products are harvested from sustainablymanaged tracts. The certifying organizations develop their own standards, which must be in harmony withthe principles and criteria. As of July 1998, there were six FSC-accredited organizations, and as ofJanuary 1999, an additional six organizations were applying for accreditation.19

By following the wood products from the forest to the distribution point, FSC-accreditedorganizations are able to certify that the “chain-of-custody” through which the wood passed did notadulterate the essential “sustainable” quality of the product. This product-based approach is one of theprimary traits that distinguishes FSC’s approach from a pure quality management system approach likeISO 14000. Forests – as opposed to forest products -- can be certified as sustainable, but seals or markscannot then be placed on products without the chain of custody certification. The process for forestcertification is less extensive than that needed product certification.

FSC Structure and Voting Process

The FSC general assembly is composed of two chambers, one representing environmentalinterests, and the other representing social and commercial interests. Each chamber must also have abalance of representatives from northern and southern countries. Environmental groups, industry groupsand individuals can be members, though individuals can comprise no more than 10% of a chamber.Commercial interests can have no more than a 25% representation in the overall voting, and can have amaximum of two representative on the nine-member Board of Directors. For a forestry principle to bepromulgated as an official FSC principle, it must pass through a working group before being proposed tothe voting assembly. A quorum of 66% of members must vote on the proposal.

Applicability to CDM

Currently, the FSC principles and criteria do not include carbon accounting per se, nor does theirtraining include methods of verifying carbon sequestration. However, many of the indicators ofsustainability that relate to forest stand biomass are directly relevant to measuring carbon, and many ofthe techniques used to ensure sustainability are identical to those used to preserve forest stands for carbonoffset projects. Moreover, several current AIJ forestry projects have already contracted (or are planningto contract) with FSC-accredited organizations to certify the land as sustainable. 19 FSC web site: http://www.fscoax.org


A.IV.3. Accreditation Bodies in the U.S.

This section of the appendix provides an overview of key accreditation bodies in the U.S.,including ANSI and NIST, NAESCO, NACLA, and NVCASE, and discusses the potential use for CDMof these institutions and their recognition structure.

ANSI and NIST

In the U.S. the premier accreditor of auditors of voluntary standards is the American NationalStandards Institute (ANSI). The National Institute of Standards and Technology (NIST) has accreditationauthority for auditors of regulatory standards. However, the U.S. accreditation structure is veryfragmented. While ANSI’s mission is to coordinate national standardization and is the nation’s premieraccreditor, it accredits auditors for only 12 product certification programs. Together with the RegistrarAccreditation Board (RAB) ANSI also administers accreditation of ISO 9000 and ISO 14000 auditors.According to NIST,20 there are approximately twenty private sector organizations and 13 federalgovernment programs that accredit product certifiers. This does not include the accreditors 48 privatesector laboratory accreditation programs nor the 31 federal government accreditation programs that exist.NIST itself operates the National Voluntary Laboratory Accreditation Program (NVLAP), which hasaccredited laboratories in a variety of fields. NVLAP accreditation criteria are published in the CFR andreferences ISO guides and standards on accreditation.

NAESCO

In the energy sector, the National Association of Energy Service Companies (NAESCO)administers an accreditation program for Energy Service Companies (ESCOs). As of January 1999,NAESCO had accredited 19 companies.21 An application for NAESCO accreditation is reviewed by acommittee of industry experts unaffiliated with any particular ESCO. The ESCO must prove its technicaland managerial competence in energy efficiency projects, which include, among other things, energyaudits and verifying energy savings according to industry practices. In its current form, NAESCOaccreditation is not especially relevant to CDM verification. Energy performance contracts are verydifferent from CDM projects, ESCOs currently do not have the expertise to audit carbon offset projects,and the NAESCO accreditation program is not based on any of the ISO guides for accreditation. IfESCOs were to seek status as accredited auditors of CDM projects via NAESCO accreditation, theaccreditation program would probably need to be restructured dramatically.

NACLA

More applicable to CDM projects than NAESCO accreditation is the accreditation of laboratoriesthat test and rate the energy efficiency of appliances. In the U.S. the abundance of accreditors and lack ofcoordination amongst them led to duplicate requirements across the country. Many labs are forced toreceive accreditation from more than one source in order for their test results to be accepted nationally.This confusing situation also hinders international trade since trading partners find it difficult todistinguish between accreditations. To remedy this situation, a consortium of public and privateaccreditation interests recently created the National Cooperation for Laboratory Accreditation (NACLA).NACLA’s role will be to harmonize the standards and practices of accreditors and then grant them“recognition” after assessing their accreditation standards. The NACLA goal, universal acceptability of

20 Toth, R.B., 1997.21 NAESCO, 1999.


the test results performed by a laboratory accredited by a NACLA-recognized accreditor, would eliminateduplication and inefficiency in the current laboratory accreditation structure. NACLA was incorporatedin the spring of 1998.22 Membership in NACLA is open to all organizations with a stakeholder interest inthe goals of NACLA and which agree to the NACLA principles.

NVCASE

To accord some central structure to accreditation of labs, product conformity schemes and qualitymanagement programs within the U.S., NIST administers the National Voluntary Conformity AssessmentSystems Evaluation program (NVCASE). NVCASE recognizes accreditation programs in a number offields. Applicants’ programs are reviewed according to international standards and criteria. Participantsin NVCASE undergo a peer review from experts and other accredited bodies. Moreover, if noaccreditation body exists in a particular field, NVCASE will perform the accreditation tasks.

22 NIST, 1997.


APPENDIX B. DEFINITIONS OF INSTITUTIONS AND THEIR POTENTIAL ROLES IN CDM

nvironomicsAppendix B, Page 1 ENovember, 1999

DEFINITIONS OF INSTITUTIONS AND THEIR POTENTIAL ROLES IN CDMBody Roles Notes

ExecutiveBoard

1. Oversee entire process.2. Publish standards for project implementation,

measurement, accreditation and auditing developed inconsultation with IPCC, SBI & SBSTA, ISO and otherexpert institutions.

3. Publish standards for reference baseline development.4. Review reference baselines.5. Maintain registries of projects, accreditation agencies,

accredited auditors and Host Country CDM Offices.6. Perform Prototype Evaluations (part assessment, part

standards development) for proposed projects withoutdeveloped standards.

7. Recognize accreditation agenciesOR

Accredit operational entities to perform 1) initialinspections (assessments of project methodologies,sustainability, baselines, etc., see glossary) that lead toregistration and 2) audits that lead to certification andissuance of CERs. Perform ongoing surveillance.

8. Oversee peer review of accreditation agencies.9. Oversee peer review of operational entities (only if EB

acts as accreditor & peer review is required of OEs).10. In the case of projects developed by governments, or if

host country lead government has not yet beenaccredited, perform initial inspections leading toregistration. (The frequency of latter case is expected todecrease as CDM matures.)

11. Review results of initial inspections or audits on randombasis and/or on a “red flag” basis.

Major decisions regarding standards might be made by theCOP/mop. The EB would carry out these decisions. The EBmight be delegated the authority to develop some or allstandards, as well as publish standards. By extension, onlythe EB would have the authority to perform assessments forwhich there are no developed standards (PrototypeEvaluations). In the early stages of CDM the EB would likelyperform more Prototype Evaluations than in years ahead.Similarly, as CDM matures, the EB could dedicate less of itstime to training and more time to overseeing peer review.

All of the functions/roles are likely to be necessary of CDM.We believe that the responsibility for these functions lies mostlogically with the EB, but they must lie somewhere if not withthe EB. The EB might choose to delegate many of thesefunctions in part or in their entirety, so that the full-timestaffing of the EB might be relatively modest. However,regardless of how the workload is allocated, it would be mosteffective for a single entity, such as the EB, to maintainoverall responsibility for ensuring that CDM operatesefficiently and reliably.

Host CountryCDM Offices

1. Oversee process within their nations.2. Assist in developing baselines.3. Develop sustainability criteria.4. Assess proposed projects for sustainability.5. Submit to review of baselines by Executive Board

baselines committee.6. Approve or reject projects

Reference baselines would be based on EB standards, butsustainability would be defined by each nation.Host Country CDM Offices would assess only thesustainability of projects.



Annex ICountry

CDM Offices

1. Oversee process within their nations.2. Approve projects as contributing towards the Annex I

nation’s Kyoto commitments. This step is much lessrigorous than the initial inspection validations, but isnecessary for project registration.

The only reason for the inclusion of this stage is the Protocollanguage calling for approval of the parties involved inspecifictransactions.

AccreditationAgencies

1. Accredit Initial Inspection Operational Entities (firms).2. Accredit Audit Operational Entities (firms).3. Accredit Initial Inspection assessment personnel

(people).4. Accredit Audit assessment personnel (people).5. Participate in peer review of other accreditors.6. Train firms and assessors to perform their tasks properly.7. Accreditors are not liable for the performance of specific

projects, but they are liable for verifying the generalcompetence of the Operational Entities.

8. Perform ongoing surveillance of OEs.

Accreditation affirms that an Operational Entity has thecapability and competence to assess projects. Accreditationdoes not have any bearing on Operational Entities’assessments of particular projects nor on the projectsthemselves, but the process assures equivalence ofassessors, adds to process transparency and helps to ensureassessor independence.

If single Operational Entities can provide both initialinspection and audit services, the firm would require twoseparate accreditations. Separate accreditation would alsolikely be needed for different types of projects (e.g., energy,forestry, etc.)

Accreditation should not be confused with audit or third partyverification.

Accreditation could be governmental or done by the EB, butwould perhaps be more efficient if it were privatized.Moreover, since nations have a stake in project success,privatization of accreditation would provide moreindependence and transparency.

The most appropriate approach for accreditation within CDMwould be for the EB to recognize either a single worldwideaccreditor or perhaps 3-5 regional accreditors. This allowsthe EB to provide oversight of the accreditor(s), and ensuresthat the accreditor(s) have a critical mass of competence thatthey can maintain without being financially dependent uponOEs.



InitialInspectionOperational

Entities

1. Receive accreditation from accreditors.

2. Perform the initial inspections that lead to registration ofprojects. This includes approval of methodologies forproducing, monitoring, measuring and calculating GHGs,issues regarding baselines, additionality and leakage,sustainable development indicators, audit requirementsand other issues for which some high authority and“judgement calls” are required. Initial Inspection appliesonly to projects for which standards are developed – ifstandards do not apply, the OE refers these projects tothe EB for prototype evaluation.

3. Register projects to the Executive Board once theprojects have passed initial inspection (and approved byall parties).

4. Participate in peer review of other operational entities, ifthis is required.

The OE’s duty of care and the extent of reasonableassurance they must provide, both of which determine theirliability for fraud or negligence in the initial inspection, shouldbe clearly defined by contracts and engagement letters.

Operational entities are third party auditors and must beaccredited by a recognized accreditation agency. Both theinstitution and its assessment personnel must be accredited.

Since initial inspection and auditing are radically differentfunctions and require significantly different expertise (andseparate accreditations), different personnel and divisions,and perhaps even different firms should carry out thesefunctions.

If the same OE were contracted to perform both initialinspections and audits for a given project, then the promise offuture work would be an incentive for the OE to registerproposed projects without merit. Ideally the functions shouldbe assigned to different firms. If the functions are performedby the same firms, special steps should be taken to ensurethat there is no conflict of interest.

OEs will most likely not accept strict liability for projects. Ifthe OEs are liable then developers will have more incentive tocheat and auditors will have more incentive to collude.



AuditOperational

Entities

1. Receive accreditation from accreditors.

2. Audit projects’ performance, outcomes and impacts. Thisprocess involves providing reasonable assurance thatproject participants’ monitored reports are true andaccurate, and that the methodologies employed forreducing and measuring emissions conform to thestandards as specified in the initial inspection andresulting registration.

3. OEs might potentially also confirm whether a project’sgoals in regards to sustainable development have beenmet.

4. Certify and issue CERs, or certify CERs and recommendto the EB that they be issued, or recommend to the EBthat CERS be certified and issued.

The OE’s duty of care and the extent of reasonableassurance they must provide, both of which determine theirliability for fraud or negligence in the audit, should be clearlydefined by contracts and engagement letters.

Operational entities are third party auditors and must beaccredited by a recognized accreditation agency. Both theinstitution and its assessment personnel must be accredited.

Since initial inspection and auditing are radically differentfunctions and require significantly different expertise (andseparate accreditations), different personnel and divisions,and perhaps even different firms should carry out thesefunctions.

If the same OE were contracted to perform both initialinspections and audits for a given project, then the promise offuture work would be an incentive for the OE to registerproposed projects without merit. Ideally the functions shouldbe assigned to different firms. If the functions are performedby the same firms, special steps should be taken to ensurethat there is no conflict of interest.

OEs will most likely not accept strict liability for projects. Ifthe OEs are liable then developers will have more incentive tocheat and auditors will have more incentive to collude.


APPENDIX C. GLOSSARY OF PROCESS STAGES FOR CONFORMITY ASSESSMENT FOR CDM

nvironomicsAppendix C, Page 1 ENovember, 1999

GLOSSARY OF PROCESS STAGES FOR CONFORMITY ASSESSMENT FOR CDMProcess Stages(alphabetically) Function w/in Scheme Notes

Accreditation

Serves to affirm the capability and qualifications ofInitial Inspection Operational Entities and AuditOperational Entities (firms).

Separate accreditations would be needed for InitialInspection and Audit. Similarly, separate accreditationswould be needed in the different CDM areas (forestry,energy, etc.).

Serves to affirm the capability and qualifications ofInitial Inspection personnel and Audit personnel(employees or contractors).

Provides ongoing surveillance of OEs to ensure thatthey are performing properly.

Accreditation assures that all projects are assessedaccording to equivalent procedures and helps ensurethe transparency of the process and the independenceof the OEs and auditors.

Accreditation must be performed by recognized bodies.Accreditors themselves must operate according tocommon standards. Where there are at least threeaccreditors, they an perform peer review amongthemselves to further assure the integrity of theaccreditation function.



Audit

Serves to assess the performance and impacts ofprojects, and to provide reasonable assurance that theprojects’ reports are true and accurate.23 Audits mustbe carried out with all due diligence and must assesspossible error or fraud.

A successful audit leads to certification.

Audits must be performed by accredited auditors, i.e.,operational entities, (both firms and personnel)according to common standards.

Audits are necessarily performed on a sampledpopulation of products and data and thus may fail tospot errors or fraud despite performance of duediligence.

Certification

Attests to the fundamental integrity of the products (theCERs).

Certification is not a guarantee of the product, butrather a statement providing a high degree ofconfidence in the product.

Certification leads to issuance of CERs.

Technically, certifications can attest to the conformity ofdifferent stages of assessment. However since theterm “Certified Emission Reduction” is specified in theKyoto Protocol, its use should be limited in the contextof CDM.

23 The following text is boilerplate language used by financial accountants in 10-K reports submitted to the SEC:

We have audited the accompanying consolidated balance sheets of [Corporation name] as of December 31, 19XX and 19XY, and the related consolidated statements ofincome, changes in shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 19XX. These financial statements are the responsibility ofthe Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of [Corporation name] at December31, 19XX and 19XY, and the consolidated results of its operations, changes in shareholders' equity, and cash flows, for each of the three years in the period ended December 31,19XX, in conformity with generally accepted accounting principles.



Initial Inspection

Assesses that a proposed project is accurately andtruthfully employing standard methodologies andtechniques in its calculations of project impacts. Thisassessment includes verification of baselines, leakage,additionality, monitoring, measurement and calculationof GHGs, and other “heavy lifting” issues.

Initial Inspection is performed by Operational Entities.

In conjunction with the approval of all parties, InitialInspection leads to Registration.

Initial Inspection provides for product uniformity andprocess transparency.

Some of the assessment functions in initial inspectionsrequire a high level of expertise. Most of the functionsrequire a high level of decision-making authority andshould not be open to second-guessing.

The OEs should be trained and/or accredited toperform this function.

ReferenceBaseline

Assessment

Assesses the methodology and accuracy of referencebaseline calculations.

A committee within the EB’s conformity assessmentcouncil would perform this function.

Peer Review

Assesses that Accreditors are performing theirfunctions according to standard. The function addstransparency to the system and assures equivalence ofprocesses. Peer review could also be required ofOperational Entities to augment the Accreditors’ongoing surveillance.

If there are at least 3 accreditors, then peer reviewcould reduce the burden on the EB to perform ongoingsurveillance of accreditors. Peer review among OEsmight be considered duplicative if the ongoing oversightby the Accreditors is deemed sufficient.



PrototypeEvaluation

Assesses the validity of proposed projects for whichthere are no applicable standards; Approves theapplicability and validity of newly developed standardsfor a proposed project; Develops standards forprototype projects.

Prototype Evaluation replaces Initial Inspections forprojects for which methodological standards have notbeen developed or for projects for which baselineshave not been developed.

In conjunction with the approval of the involved parties,Prototype Evaluation leads to Registration.

Prototype Evaluation provides the means for innovativeproject ideas to enter the market, yet ensures that themethods can be tested and reproduced; it provides forproduct uniformity and process transparency. The factthat it should only be performed by the EB (or the EB’sdelegated authority) provides for process efficiency.

Since Prototype Evaluation includes a standardsdevelopment component, it requires the highest level ofexpertise and authority, it should only be performed byan arm or designate of the Executive Board.

Recognition

Designates an accrediting entity as having the authorityand expertise to accredit auditors and operationalentities. Recognition provides for equivalence andprocess transparency.

(Also see Accreditation.)

Recognition should be performed by an arm ordesignate of the EB.



Registration

Registration is the outcome of an Initial Inspection or aPrototype Evaluation in combination with approval bythe involved parties. It confirms that a proposed projecthas been assessed and accepted as a CDM projectand therefore has the potential to create CERs. InitialInspection and Registration also confirm that a projecthas an acceptable audit plan in place.

Registration could be performed by OperationalEntities. Their role would be to confirm to the EB that aproject has passed its initial inspection and hasfurthermore been approved by the involved parties.

StandardsDevelopment

Forms the bedrock for the entire conformityassessment system by providing measures throughwhich to ensure that products and processes areuniform and harmonized.

Standards and guidelines should be developed formethodologies for reducing or sequestering GHGs;measuring the impacts of reduction or sequestrationtechniques; reporting impacts, auditing projects andreports; accrediting auditors (firms and personnel);assessing projects via initial inspections; andperforming peer reviews.

In order for the CDM system to have any credibility,standards should only be published by one entity. TheCOP/mop may delegate this authority to the ExecutiveBoard. However, in order for the standards to beaccepted, they should probably be developed byconsultation with expert institutions such as the IPCC,SBI & SBSTA, Host Country CDM Offices, and ISO andother standardizing bodies.


APPENDIX D. QUESTIONS AND ANSWERS REGARDING CONFORMITY ASSESSMENTAND ITS APPLICATION TO CDM

nvironomicsAppendix D, Page 1 ENovember, 1999

Q & A on Potential Standardization and Conformity Assessment System for CDM

Contents

I. Questions about the Executive Board’s functions (Page 2)1.1 What is Prototype Evaluation and why is it necessary?1.2 Why does the EB perform the Prototype Evaluation and not a Host Country CDM Office or a

private auditing (operational entity)?1.3 What is recognition and why is it necessary?1.4 Why does the EB perform recognition and not a Host Country CDM Office?1.5 Why does the EB review some initial inspections some audits performed by operational

entities? (Why any at all or why not all?)

II. Questions about the Host Country CDM Offices' functions (Page 4)2.1 What do the Host Country CDM Offices do?2.2 Why do the Host Country CDM Offices establish sustainable development criteria and assess

the sustainable development performance of projects?2.3 Why do Host Country CDM Offices establish baselines?2.4 What ensures that Host Country CDM Offices have the expertise to establish baselines? What

ensures that they perform their functions honestly?

III. Questions about Accreditation (Page 5)3.1 What is accreditation and why is it necessary?3.2 Why must accreditors be recognized?3.3 How does accreditation ensure that operational entities operate according to equivalent

procedures?3.4 What ensures that accreditors operate correctly and honestly?

IV. Questions about the Operational Entities (Page 6)4.1 What do the Operational Entities do?4. 2 What are Initial Inspections and why are they necessary?4.3 Are there cases in which an OE couldn't or shouldn't perform an Initial Inspection?4.4 What qualifications might an OE need?4.5 What ensures that operational entities are credible and capable?4.6 Should the assessments performed by OEs be re-audited by another entity?

V. Questions about the system in general (Page 8)5.1 What ensures the integrity of the CERs?5.2 Who guarantees the CERs?


I. QUESTIONS ABOUT THE EXECUTIVE BOARD’S FUNCTIONS

1.1 What is Prototype Evaluation and why is it necessary?

Prototype Evaluation is an activity that is part standards development and part assessment ofproposed projects. We envision that occasionally project developers will propose innovative projects forwhich there are no developed standards against which to judge the project. It may be that the project’sproposed method of GHG reduction is innovative, that its proposed method of monitoring or calculationis innovative, or that some other aspect of the proposal radically differs from standard and wellunderstood approaches that a normal initial inspection will not be capable of assessing the projectspotential for GHG reduction. Similarly, a project might be proposed in an area for which baselines havenot been defined. In order encourage innovations, a mechanism needs to be in place such that theproposed projects can be assessed. Standards for the proposed project and for future projects using thesame methodologies will essentially be developed as an outcome of the evaluation. It may be that manyof the first projects proposed under CDM will require Prototype Evaluation.

1.2 Why does the EB perform the Prototype Evaluation and not a Host Country CDM Office or a privateauditor (operational entity)?

Decisions regarding standards ought to be made by one central authority. To do otherwise woulddamage the system’s integrity and credibility. The process of conducting a Prototype Evaluation wouldinclude some degree of standards development. Moreover, the level of expertise needed to makejudgements and decisions is not likely to be abundant. Similarly, entities with less authority than the EBmay not be acceptable bodies to influence the entire system as these decisions inevitably would.

1.3 What is recognition and why is it necessary?

If the EB decides to delegate accreditation authority to other organizations, it must recognizethem. If an arm of the EB functions as the sole accreditor, recognition would be superfluous.Recognition is the designation by an authoritative body that another entity is capable and competent toaccredit auditors and auditing organizations. Recognition grants agencies the authority to accredit.Without recognition, any self-appointed entity could function as an accreditor. Since accreditation helpsensure equivalence, competence and independence of auditors and auditing organizations, theaccreditation process is key to the system’s credibility. If accreditation itself is not credible the systemsuffers. Recognition ensures that accreditation is legitimate. (See also section III.)

1.4 Why does the EB perform recognition and not a Host Country CDM Office?

As described in detail in the main paper, it does not seem likely that many host countries would havethe necessary expertise to staff their own accreditation bodies. Further, it seem likely that many hostcountries would have a sufficient number of projects or OEs to ensure that the accreditors decisions for aspecific OE would not be influenced by the accreditor’s concerns regarding its financial viability.Therefore, at least in the initial stages of CDM, system integrity for CDM would be served best if the EBrecognized either a single worldwide accreditor, or perhaps 3-5 regional accreditors.

1.5 Why does the EB review some initial inspections and some audits performed by operational entities?(Why any at all or why not all?)

Just as the The United States Internal Revenue Service (IRS) chooses to review a smallpercentage of tax returns each year, the EB may want to review some of the initial inspections and some


of the audits performed by operational entities. Spot checking on a random basis, in addition toperforming such audits for projects whose results raise “red flags” (e.g., extraordinary number of CERsclaimed) serves to enhance and ensure system integrity. Spot checking is adequate because the systemitself is designed for a high level of integrity: recognition, accreditation, peer review, and audits all act asmechanisms to maintain the integrity of the system and the products (the CERs). Within this system, spotchecking assessments is surely adequate -- the frequency for spot checking and the criteria used to selectprojects for spot checking can be adjusted as needed.

It would be grossly inefficient to always require duplicate assessments. The IRS does not audit alltax returns, nor does the IRS require tax payers to obtain a second opinion from third-party accountants.Always requiring duplicate audits strongly implies a lack of confidence in the system itself. In such acorrupt environment, the validity of duplicate audits themselves would have to be questioned (unless theyare all performed by the EB itself) – in this case, the entire purpose of assessment seems questionable.


II. QUESTIONS ABOUT THE HOST COUNTRY CDM OFFICE’S FUNCTIONS

2.1 What do the Host Country CDM Offices do?

Host Country CDM Offices coordinate CDM activities within their countries. They may recruitdevelopers, assist projects and set policy for project implementation. Further, the Host Country CDMOffices would maintain registries of projects and project activities within their countries. Within thecontext of conformity assessment, the Host Country CDM Offices would 1) define the parameters andstandards of sustainable development that CDM projects must meet, 2) assess projects’ conformance tothe sustainable development standards, 3) establish reference baselines against which project performanceis measured, and 4) approve proposed projects for registration.

2.2 Why do the Host Country CDM Offices establish sustainable development criteria and assess thesustainable development performance of projects?

One of the primary goals of CDM is to contribute to host nations’ sustainable development. Theterm itself is nebulous and can have different meanings to different nations. Each nation will likely haveits own list of development priorities that it would like emphasized in CDM projects. It therefore islogical for each country to establish its own set of criteria for sustainable development.

By extension, it may also prove logical for the Host Country CDM Offices (rather than OEs) toassess the sustainable development impacts of projects. OEs will be trained and accredited to assessconformance of projects to international standards and hence will not receive training or accreditationregarding national sustainable development criteria. Moreover, sustainable development criteria willserve to benefit the host countries, but not specifically the project operators, developers or even the GHGreduction goals of the Kyoto Protocol. Project developers may balk at having to pay OEs for assessmentof sustainable development criteria.

2.3 Why do Host Country CDM Offices establish baselines? (Why not the IPCC or the EB? Why notOEs?)

Baselines are likely to be specific to individual nations. While the processes by which baselinesare established may be uniform, the baselines themselves are likely to be relevant only to the conditions inspecific nations. Baselines might be established for sectors of the economy, for specific classes ofprojects, for particular projects, or by some method combining all of the above. Regardless, it would behighly inefficient for the IPCC or the EB to establish actual baselines for all nations. However, the IPCCor the EB might determine it to be appropriate to establish standards for how baselines should becalculated.

2.4 What ensures that Host Country CDM Offices have the expertise to establish baselines? What ensuresthat they perform their functions honestly?

The Executive Board could consider providing assistance in the form of training for Host CountryCDM Offices in baseline setting, and might consider reviewing their baselines to ensure that they weredone properly. Standards for setting baselines could be established by the EB under consultation with theIPCC, SBSTA and SBI.


III. QUESTIONS ABOUT ACCREDITATION

3.1 What is accreditation and why is it necessary?

Accreditation is the affirmation by an authoritative body that operational entities and theirpersonnel (auditors) are capable and competent to assess projects’ conformance to standards.Accreditation does not vouch for the validity of any particular assessment or CER, only that the entity andpeople performing the assessment are qualified. Accreditation ensures that operational entities and theirpersonnel operate according to equivalent procedures and helps ensure that they are independent.Accreditors also perform ongoing surveillance to ensure that OEs perform properly.

3.2 Why must accreditors be recognized?

See the answer to 1.3.

3.3 How does accreditation ensure that operational entities and their personnel operate according toequivalent procedures?

Accreditors would perform their duties according to common standards. ISO/ IEC Guide 61 setsbasic requirements for accreditation agencies. The EB could develop standards and guidelines for CDMaccreditation using Guide 61 as the basis for that effort. Even if an arm of the EB performs accreditation,these standards are essential.

Section 2 of Guide 61, includes: general provisions for accreditation bodies; guidelines for theirstructural organization; guidelines for subcontracting; a requirement that the body have a qualitymanagement system in place; outlines conditions for granting, maintaining, extending, reducing,suspending and withdrawing accreditation; guidelines for internal audits, documentation, records andconfidentiality; guidelines for accreditation personnel; guidelines for selecting auditors, guidelines ondecisions to accredit; guidelines on references to accredited status; guidelines on changes in theaccreditation requirements; and guidelines on disputes.

3.4 What ensures that accreditors operate correctly and honestly?

The process of recognition by the EB is one method of ensuring that accreditors are themselvesqualified. Additionally, if there are more than three accreditors, they can submit to peer review by otheraccreditors under the coordination of the EB. Further, if accreditors are private rather than governmentalbodies, they will have no connection to a project or incentive to allow lax auditing. If an arm of the EB isthe accreditor, or if there is a single accreditor, it still must apply the appropriate standards, and itsperformance can be reviewed on this basis.


IV. QUESTIONS ABOUT THE OPERATIONAL ENTITIES

4.1 What do the Operational Entities do?

The Operational Entities have four basic functions. 1) The first function is to perform initialinspections of proposed projects. Initial Inspections verify that projects have the potential to produceCERs and establish a schedule of future audits. (See 4.2 for more on initial inspections). 2) The outcomeof a successful initial inspection (and a verification that host country approval and approval of involvedparties have been secured) is registration of the project with the EB as a CDM project. 3) OperationalEntities also audit projects. Audits assess whether a project’s monitored and reported impacts areaccurate and true. 3) Upon determining that a project’s reports are accurate and true, the auditor wouldgrant the CERs or issue reccomendation for certification and issuance.

4. 2 What are Initial Inspections and why are they necessary?

Initial Inspections are the assessments that verify whether or not a proposed project will usestandard methodologies, whether the project meets the criteria of CDM, and the number of CERs that theproject can be expected to produce. Initial Inspections, in conjunction with the approval of each party,lead to registration of the project as a CDM project. Among other things, Initial Inspections assess broadscope issues such as sustainability, baselines, leakage, and additionality. Without Initial Inspections(occurring prior to project implementation), developers would be wary of investing money, projectswould have difficulty proving their reductions, and the CDM system would stagnate. The initialinspection and registration also set out project-specific requirements including periodic.

4.3 Are there cases in which an OE couldn’t or shouldn’t perform an Initial Inspection?

We expect that there will be situations where projects are proposed for which there are nodeveloped standards or for which baselines have not been established. In these cases, PrototypeEvaluations take the place of Initial Inspections. (See 1.1 and 1.2 for more details.)

4.4 What qualifications might an Operational Entity need?

In general, the operational entities would need a combination of conformity assessment orauditing expertise and some technical expertise for the types of projects that will be assessed (forexample, expertise in forestry projects or in energy projects). The OEs performing Initial Inspectionwould need a different set of expertise from those performing audits. Additionally, auditors would needto be entirely free of any ties to project developers and participants or to other potential users (buyers orsellers) of CERs.

ISO has developed the following guidelines which may be useful or adaptable for the purposes ofCDM:

• ISO 14010:1996 Guidelines for environmental auditing -- General principles;• ISO 14011:1996 Guidelines for environmental auditing -- Audit procedures -- Auditing of

environmental management systems; and• ISO 14012:1996 Guidelines for environmental auditing -- Qualification criteria for environmental

auditors.


4.5 What ensures that operational entities are credible and capable?

All Operational Entities must be accredited by recognized accreditation agencies. Accreditation’srole is to affirm the qualifications of auditors and to ensure that auditors operate according to equivalentstandards and procedures. Accreditors also perform ongoing oversight of OEs. Additionally, OEs couldpeer review each other’s procedures.

Moreover, the fact that Operational Entities are independent ensures that they have no stake in theoutcome of any project. Further, integrity can be enhanced by having different OEs perform initialinspection and audits for a given project.

4.6 Should the assessments performed by operational entities be re-audited by another entity? Is there aneed for further independent verification?

Similar to an IRS audit of business or personal taxes, we envision that the Executive Board maywant to further review the results of certain assessments on a surprise basis. Some of the targets forsurprise audits may be chosen via sampling methods from the general pool of audits while others may bechosen if they raise certain red flags. The EB may delegate some technical body within the EB toperform this task, or may even contract the work out to other private firms. (Ideally, the private firmswould not be accredited to perform “regular” audits as this would engender various conflicts of interest.)

We believe that any system of re-audit more extensive than the one outlined above would havelittle additional value and would be very costly. A system of accreditation of auditors and recognition ofaccreditors, coupled with the EB’s surprise audits is sufficient to ensure the independence andcompetence of the operational entities. Establishing a second tier of auditors and requiring a re-audit ofevery project would greatly burden CDM and likely achieve minimal additional benefit.


V. QUESTIONS ABOUT THE SYSTEM IN GENERAL

5.1 What ensures the integrity of the CERs?

Adherence to standards, accreditation and routine peer review ensure the integrity of the systemand the CERs. Additionally, surprise reviews by the EB furthers this goal.

There are several activities that ensure system integrity:

a) The Executive Board’s standardization of methods for establishing reference baselines, projectmethods, measurement, monitoring and calculation methodologies, initial inspection procedures,audit procedures and accreditation procedures.

b) The EB’s recognition of accreditation agencies.c) The routine peer review of accreditation agencies.d) The surprise review by the EB of some accreditation agencies’ procedures.e) The surprise review by the EB of some accreditations.f) The accreditation agencies’ training and accreditation of operational entities.g) The accreditation agencies’ ongoing surveillance of operational entities.h) The periodic re-accreditation of operational entities.i) The routine peer review of operational entities.j) The operational entities’ initial inspections and audits of projects.k) The surprise review by the EB of some OEs procedures.l) The surprise review by the EB of some project registrations or certifications.

Moreover, the fact that each entity within the scheme may be held liable for their specific actions(e.g., accreditors may be liable for their accreditations, operational entities may be liable for their audits,and projects may be liable for their project implementation and claims) instills more credibility into thesystem. Finally, the fact that accreditors must be independent of operational entities, and operationalentities must be entirely independent of project further bolsters the system’s integrity.

5.2 Who guarantees the CERs?

It should be recognized that conformity assessment does not act as a guarantee of the CERs.Registrations would attest to a project’s capability to produce CERs, given that everything the assessorsevaluate in an Initial Inspection is true and accurate. More importantly, Certifications would attest to thefact that the auditors performed due diligence in auditing the project reports. The certifications wouldprovide confidence (or “reasonable assurance”) – not a guarantee – that the reports are true and accurate.Auditors provide reasonable assurance that the project’s claims are free of fraud and error, but it would bevirtually impossible for auditors to do more than review the data provided to them and sample theevidence.


The following text is boilerplate language used by financial accountants in 10-K reports (annualfinancial statements) submitted to the United States Securities and Exchange Commission. The languageoutlines the roles and responsibilities of auditors:

We have audited the accompanying consolidated balance sheets of[Corporation name] as of December 31, 19XX and 19XY, and the relatedconsolidated statements of income, changes in shareholders' equity, and cashflows, for each of the three years in the period ended December 31, 19XX.These financial statements are the responsibility of the Corporation'smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of [Corporation name] atDecember 31, 19XX and 19XY, and the consolidated results of its operations,changes in shareholders' equity, and cash flows, for each of the three years inthe period ended December 31, 19XX, in conformity with generally acceptedaccounting principles.


APPENDIX E. EXAMPLES OF ISO DOCUMENTS THAT MAY BE USEFUL INDESIGNING CDM STANDARDS

nvironomicsAppendix E, Page 1 ENovember, 1999

Examples of ISO Documents that may be Useful in Designing CDM StandardsStandardsISO 14001 – Environmental management systems -- Specification with guidance for useISO 14004 – Environmental management systems -- General guidelines on principles, systems and supporting techniquesISO 14010 – Guidelines for environmental auditing - General principlesISO 14011 – Guidelines for environmental auditing - Audit procedures - Auditing of environmental management systemsISO 14012 – Guidelines for environmental auditing - Qualification criteria for environmental auditorsISO 14020 – Environmental labels and declarations -- General principlesISO/DIS 14031 Environmental management -- Environmental performance evaluation – GuidelinesISO 14040 -- Environmental management -- Life cycle assessment -- Principles and frameworkISO 14041-- Environmental management -- Life cycle assessment -- Goal and scope definition and inventory analysisISO/DIS 14042 Environmental management -- Life cycle assessment -- Life cycle impact assessmentISO/DIS 14043 Environmental management -- Life cycle assessment -- Life cycle interpretationISO/IEC 17020 -- General criteria for the operation of various types of bodies performing inspection

GuidesISO/IEC Guide 7 - Guidelines for drafting of standards suitable for use for conformity assessmentISO/IEC Guide 27-- Guidelines for corrective action to be taken by a certification body in the event of misuse of its mark ofconformityISO/IEC Guide 28 -- General rules for a model third-party certification system for productsISO/IEC Guide 60 -- ISO/IEC Code of good practice for conformity assessmentISO/IEC Guide 61 – General requirements for assessment and accreditation of certification/registration bodiesISO/IEC Guide 62 -- General requirements for bodies operating assessment and certification/registration of quality systemsISO Guide 64: Guide for the inclusion of environmental aspects in product standardsISO/IEC Guide 65:1996 General requirements for bodies operating product certification systems

Technical ReportsISO/DTR 14049 -- Environmental management -- Life cycle assessment -- Examples for the application of ISO 14041ISO/DTR 14032 -- Environmental management -- Examples of environmental performance evaluation (EPE)ISO/DTR 14025 – Environmental labels and declarations -- Type III environmental declarationsISO/TR 14061-- Information to assist forestry organizations in the use of Environmental Management System standards ISO14001 and ISO 14004ISO/IEC TR 17010 -- General requirements for bodies providing accreditation of inspection bodies


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