In addition to the usual risks of a conventional international project, a CDM project involves additional risks both on the side of the costs and on the side of the revenues.

Risks as regards the costs of CDM projects:

Here, there is a risk of increased transaction costs, due to unexpectedly substantial verification and reporting requirements because of new rules of the CDM Executive Board (Executive Board - EB) or of individual participating countries.

Risks as regards the revenues of CDM projects:

The number and the value of the emission reduction credits are essential to the monetary benefits of the of the CDM approval. Number of CERs: This depends on the baseline and the project emissions. Baseline risks are, for example, dependent of the way a project-specific baseline is created and whether it needs to be adjusted to new adjustments during the period of the CDM project.  The project emissions can vary, particularly due to a modified production level or modified emission factors, which can turn out to be higher or lower than expected.

Value of the CERs: The expected future market price of CERs is subject to significant risks. The price depends on a variety of market factors, such as the quantity of emission allowances issued by Russia and other Eastern European countries and the way other emission trading systems, for instance in Australia or the USA, are designed. The demand for CERs is also determined by the demand in the free market.

The criteria result from the Marrakesh Accords of 2001 (http://unfccc.int/cop7) and especially from the decisions of the CDM Executive Board (http://cdm.unfccc.int/EB/index.html) and the respective national requirements. All the ideas for CDM projects, involve essentially the verification of additionality of emission reductions, the so-called "Additionality."

In this context, a project is "additional" under the Kyoto Protocol, when the emissions are lower after the implementation of the project than the emissions that would have been released without the project. Another requirement is that the measure to reduce the emissions would not have been taken without the co-financing of CERs. Reduction measures, which are required by existing national environmental regulations basically don't meet the additionality criterion.

The latest version 5.2 of the Guide of additionality was adopted during the 39th meeting of the CDM Executive Board and can be retrieved at:

cdm.unfccc.int/methodologies/PAmethodologies/tools/am-tool-01-v5.2.pdf

With the incentive of emission reduction credits, previously unexploited emission reduction potentials should be opened up. An overlapping with projects, which would be implemented even without the incentive of the award of emission reduction credits ("business as usual"), should be avoided.

The reduction measures which exceed the "business as usual" are therefore referred to as "additional". Additionality is demonstrated by the construction of a reference case scenario (baseline), which reflects the "business as usual" case. The emission reduction, achieved by the CDM project can be calculated on the basis of a comparison of the expected project emissions with those of the reference case scenario (see Figure 2). Here, emission reductions (t CO2e per year) both in a scenario with constant baseline emissions and in a scenario with increasing baseline emissions can be taken into consideration. It is crucial that the evolution of the baseline as well as the project emissions can be sufficiently substantiated.

The criterion of "additionality" ensures that only those project proposals, whose implementation is dependent from the co-financing by means of CERs, will be supported by the issuance of CERs. This means that the projects not necessarily have to show a monetary loss or a poor return in order to provide proof of additionality.  It's only in exceptional cases that a project with poor profitability becomes highly profitable thanks to its recognition as a CDM project. As a point of fact, in cases where projects have already a good profitability, other barriers that hinder the implementation have to be verified (e.g. attractive alternative projects, the first project of its kind in the country, etc.).

For the preparation of the baseline and for monitoring the emission reductions, the projects participants have to proceed according to accepted methods, i.e. use an approved "methodology".

The costs associated with the monitoring should always be taken into account when developing the baseline. Conceiving the project as a whole enables to optimize the application of the methodology.

There is a growing catalogue of such methodologies for different project categories and types (see cdm.unfccc.int/methodologies), each linked to specific applicability requirements. If there is no approved methodology for a certain CDM project idea, than a methodology has to be developed on the basis of specific requirements. However, this increases the development costs of the project considerably. The methodologies submitted to and approved by the CDM Executive Board are freely available and free to use.

The required actions in the context of a CDM project essentially consist of project design, approval, validation and registration, implementation and monitoring, verification and certification as well as the issuance of emission reduction credits.

At least half a year needs to be scheduled for the steps prior to the registration, and these should take place alongside the other project planning. In case a prior approval of a new methodology is necessary, this phase will be extended by at least another six months.

For small-scale CDM projects, simplified modalities and procedures apply for the application of methodologies and the demonstration of additionality.

CDM projects, which don't exceed the following limits, are regarded as a small-scale CDM projects:

• Projects for the use of renewable energy up to a capacity of 15 MW
• Projects for the  improvement of energy efficiency up to 60 GWh per year
• Other emission reduction projects with direct project emissions below 15,000 t CO 2 e per year and emission reductions up to 60,000 t CO2e per year
• Afforestation projects with a net CO 2 storage under 16,000 tons per year

All other CDM projects are classified as large-scale CDM projects.

Besides the usual project participants the following institutions are also relevant for a CDM project:

• Project participants:
  The project participant(s) is or are explicitly named in the project documents. They carry the technical responsibility for the CDM project or are involved as an investor in the project. The resulting credits are distributed among all the project participants, i.e. at the moment of the issuance of the CER, there has to be an agreement between all the project participants, listed in the project documents, on the way of distribution.   In general, there is one project participant on-site and one from an industrialized country. Projects without participants from an industrialized country are called unilateral CDM projects. Usually, the project participants are assisted by a consultancy, specialized in CDM.

• Authorised bodies, the so-called certification bodies (Designated Operational Entity - DOE):
  These bodies are responsible for the validation and verification of a CDM project. They have to have been accredited and published by the CDM Executive Board and are appointed by the project initiator.

• CDM Executive Board (including subordinate panels, such as the Methodology Panel): The CDM Executive Board is the central body. It is in charge of the supervision of the CDM. It is on its turn subject to the authority and guidance of the Conference of the Parties to the Kyoto Protocol. Detailed issues, such as the type of method are dealt with by subordinate panels. The authorised body constitutes the interface between the project initiator and the CDM Executive Board.

• Competent national authorities (Designated National Authority - DNA): The competent national authorities of both the host country (state, on whose territory the CDM project will be implemented) and the investor country (state, approving the project for the first buyer of the credits) have to agree on the CDM project.

Normally, this is not possible. Normally, only projects which aren't realized yet can be accepted as CDM projects, because of the requirement of additionality of emission reductions. In case a plant is already operational, it is usually to be regarded as a reference case scenario.

A large part of the emissions of greenhouse gas  is caused by very small sources in enterprises, private households, public spaces and by traffic. This potential for emission reductions can be addressed methodically by the programmatic approach, the so-called "Program of Activities - PoA. The various PoAs make the economic incentives in the context of the Kyoto Protocol for small and micro measures applicable to individuals and businesses. JI-PoAs relate to activities in developed countries, for example, by replacing inefficient boilers in small business or by switching from oil to natural gas. In a PoA, these measures can be cost-effectively combined, because the combined revenue from the CO 2-certificates can be used to finance subsidy tools to stimulate the appropriate measures, such as price reductions, grants or interest subsidies.

In Germany, the programmatic approach for JI projects can be used via the shortened approval procedure, the so-called "Track 1" procedure. A concrete example is the JI-PoA ECO-Plus of AGO AG, which saves about 55,000 t CO 2 e on biomass per year by the early replacement of  heating stations with a capacity between 400 kW and 20 MW.   The conversion of smaller energy plants that are not affected by emission trading  to a less emissions-intensive fuel recovers also emission reduction potential in Germany, which can be exploited efficiently with a JI-PoA.

Oceans, the lithosphere and ecosystems act as carbon sinks because they absorb and store CO2 from the atmosphere in a temporary or permanent way. In the language of climate protection, measures in the context of carbon sink projects mean measures  in ecosystems (e.g. forests, bogs and soil), which bind  the carbon contained in atmospheric CO 2 via photosynthesis in the biomass. The CO2 bonding can be reversed - either intentionally, for example, by logging or due to natural events, such as forest fires.

Because of the fact that this non-durability of CO 2 storage in carbon sink projects in comparison to the CO 2 avoidance in other projects is mapped correctly, only temporarily valid certificates can be  generated by  carbon sink projects. These have to be replaced at determined points in time by "standard" CERs from non- carbon sink projects, or by carbon sink credits, which are valid at that date. Carbon sink credits are not utilizable in the European emission trading, neither in the current period from 2008 to 2012, nor in the next period from 2013 to 2020. In the current obligation period of the Kyoto Protocol, only afforestation and reforestation are possible as carbon sinks projects under the CDM. This limitation to a single project activity and the fact that the certificates are not permanently valid and cannot be utilized in the European emission trading, have resulted in the fact that so far only a handful of CDM carbon sink projects have been implemented.

If a project does not qualify for CDM or JI, there is the possibility of implementing it as a so-called Verified Emission Reduction Project (VER project). VER projects are particularly suitable as an alternative for CDM or JI

• in countries that have not ratified the Kyoto Protocol,
• in countries that do have ratified the Kyoto Protocol, but don't dispose over the legal framework for the implementation of CDM or JI projects
• for sectors that are not covered by the Kyoto Protocol,
• for micro-projects with a reduction quantities of less than 1,000 t CO 2e per year as well as
• in cases in which the registration of a CDM or JI project is delayed, for example by a protracted recognition of a new methodology.

CDM projects can only generate CERs as from the date of the registration of a CDM project. The generation of VERs can constitute an alternative for CDM projects, during the period of the delay of the registration, for instance in the time-consuming phase of the recognition of a new methodology, if the corresponding plant is already operational before the CDM registration.

The procedure of VER projects is very similar to the procedure of CDM projects. Most of the time, the same templates are used for the description of the projects (utilization of methodologies that are approved for CDM projects). Usually, VER projects will be validated and subsequently verified. This is usually carried out by organizations that are authorized under the Kyoto Protocol to assess CDM and JI projects (companies that are accredited to the UNFCCC for this purpose). Since these VER projects are not formally registrable as CDM projects, various standards (such as the gold standard, The Voluntary Carbon Standard, VER +) are used to ensure the quality of the saved emission reductions and in order to be able to register the projects under this standard. The verified emission reductions (VERs) are mainly in demand by companies and organizations in order to neutralize for instance the own travel or other emissions of their business. Meanwhile, also private individuals increasingly compensate for emissions, such as those generated by air travel or other activities.