Clean Development Mechanism

CDM directs here. For other uses see CDM (disambiguation).

The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol allowing industrialised countries with a greenhouse gas reduction commitment (called Annex B countries) to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. A crucial feature of an approved CDM carbon project is that it has established that the planned reductions would not occur without the additional incentive provided by emission reductions credits, a concept known as "additionality".

Distribution of CDM emission reductions, by country.

The CDM allows net global greenhouse gas emissions to be reduced at a much lower global cost by financing emissions reduction projects in developing countries where costs are lower than in industrialized countries. However, in recent years, criticism against the mechanism has increased. Critics claim many approved projects are not actually additional.

The CDM is supervised by the CDM Executive Board (CDM EB) and is under the guidance of the Conference of the Parties (COP/MOP) of the United Nations Framework Convention on Climate Change (UNFCCC).

History and Purpose

The CDM was an important feature of the negotiations leading up to the Kyoto Protocol. Some governments desired flexibility in the way that emission reductions could be achieved and proposed international emissions trading as a way of achieving cost-effective emission reductions. At the time it was considered a controversial element and was opposed by environmental NGOs and, initially, by developing countries who felt that industrialised countries should put their own house in order first and feared the environmental integrity of the mechanism would be too hard to guarantee (see Environmental Concerns below). Eventually, and largely on US insistence, the CDM and two other flexible mechanisms were written into the Kyoto Protocol.

The purpose of the CDM was defined under Article 12 of the Kyoto Protocol. Apart from helping Annex B countries comply with their emission reduction commitments, it must assist developing countries in achieving sustainable development, while also contributing to stabilization of greenhouse gas concentrations in the atmosphere.

To prevent industrialised countries from making unlimited use of CDM, Article 6.1 d) has a provision that use of CDM be ‘supplemental’ to domestic actions to reduce emissions. This wording has led to a wide range of interpretations - the Netherlands for example aims to achieve half of its required emission reductions (from a BAU baseline) by CDM and Joint Implementation (JI). It treats Dutch companies' purchases of European Emissions Trading Scheme allowances from companies in other countries as part of its domestic actions.

The CDM gained momentum in 2005 after the entry into force of the Kyoto Protocol. Before the Protocol entered into force, investors considered this a key risk factor. The initial years of operation yielded fewer CDM credits than supporters had hoped for, as Parties did not provide sufficient funding to the EB. This left it understaffed.

The Adaptation Fund was established to finance concrete adaptation projects and programmes in developing countries that are Parties to the Kyoto Protocol. The Fund is to be financed with a share of proceeds from clean development mechanism (CDM) project activities and receive funds from other sources.

CDM project process

Outline of the project process

An industrialised country that wishes to get credits from a CDM project must obtain the consent of the developing country hosting the project that the project will contribute to sustainable development. Then, using methodologies approved by the CDM Executive Board (EB), the applicant (the industrialised country) must make the case that the carbon project would not have happened anyway (establishing additionality), and must establish a baseline estimating the future emissions in absence of the registered project. The case is then validated by a third party agency, called a Designated Operational Entity (DOE), to ensure the project results in real, measurable, and long-term emission reductions. The EB then decides whether or not to register (approve) the project. If a project is registered and implemented, the EB issues credits, called Certified Emission Reductions (CERs, commonly known as carbon credits, where each unit is equivalent to the reduction of one metric tonne of CO₂e, e.g. CO₂ or its equivalent), to project participants based on the monitored difference between the baseline and the actual emissions, verified by the DOE.

Establishing additionality

To avoid giving credits to projects that would have happened anyway ("freeriders"), rules have been specified to ensure additionality of the project, that is, to ensure the project reduces emissions more than would have occurred in the absence of the project. There are currently two rival interpretations of the additionality criterion:

1. What is often labelled ‘environmental additionality’ has that a project is additional if the emissions from the project are lower than the baseline. It generally looks at what would have happened without the project.
2. In the other interpretation, sometimes termed ‘project additionality’, the project must not have happened without the CDM.

A number of terms for different kinds of additionality have been discussed, leading to some confusion, particularly over the terms 'financial additionality' and 'investment additionality' which are sometimes used as synonyms. 'Investment additionality', however, was a concept discussed and ultimately rejected during negotiation of the Marrakech Accords. Investment additionality carried the idea that any project that surpasses a certain risk-adjusted profitability threshold would automatically be deemed non-additional. 'Financial additionality' is often defined as an economically non-viable project becoming viable as a direct result of CDM revenues.

At present, the CDM Executive Board deems a project additional if its proponents can document that realistic alternative scenarios to the proposed project would be more economically attractive or that the project faces barriers that CDM helps it overcome.

Many investors argue that the environmental additionality interpretation would make the CDM simpler. Environmental NGOs have argued that this interpretation would open the CDM to free-riders, permitting developing countries to emit more CO₂ while failing to produce emission reductions in the CDM host countries.

It is never possible to establish with certainty what would have happened without the CDM or in absence of a particular project, which is one common objection to the CDM. Nevertheless, official guidelines have been designed to facilitate uniform assessment set by the CDM Executive Board for assessing additionality.

Establishing a baseline

The amount of emission reduction, obviously, depends on the emissions that would have occurred without the project minus the emissions of the project. The construction of such a hypothetical scenario is known as the baseline of the project. The baseline may be estimated through reference to emissions from similar activities and technologies in the same country or other countries, or to actual emissions prior to project implementation. The partners involved in the project could have an interest in establishing a baseline with high emissions, which would yield a risk of awarding spurious credits. Independent third party verification is meant to avoid this potential problem.

Methodologies

Any proposed CDM project has to use an approved baseline and monitoring methodology to be validated, approved and registered. Baseline Methodology will set steps to determine the baseline within certain applicability conditions whilst monitoring methodology will set specific steps to determine monitoring parameters, quality assurance, equipment to be used, in order to obtain datas to calculate the emission reductions. Those approved methodologies are all coded. "AM" stands for "Approved Methodology," "ACM" stands for "Approved Consolidaded Methodology," "AMS" stands for "Approved Methodology for Small Scale Projects" and so on. All the approved methodology are listed in the UNFCCC home page. If a project developer can not find an approved methodology that fits in his/her particular case, the project developer may submit a new methodology to the Meth Panel, and if approved the new methodology will be converted to a Approved Methodology.

Financial issues

With costs of emission reduction typically much lower in developing countries than in industrialised countries, industrialised countries can comply with their emission reduction targets at much lower cost by receiving credits for emissions reduced in developing countries as long as administration costs are low.

The IPCC has projected GDP losses for OECD Europe with full use of CDM and Joint Implementation to between 0.13 and 0.81 % of GDP versus 0.31 to 1.50 % with only domestic action.

While there would always be some cheap domestic emission reductions available in Europe, the cost of switching from coal to gas could be in the order of €40-50 per tonne CO₂ equivalent. CERs from CDM projects were in 2006 traded on a forward basis for between €5 and € 20 per tonne CO₂ equivalent. The price depends on the distribution of risk between seller and buyer. The seller could get a very good price if it agrees to bear the risk that the project's baseline and monitoring methodology is rejected; that the host country rejects the project; that the CDM Executive Board rejects the project; that the project for some reason produces fewer credits than planned; or that the buyer doesn't get CERs at the agreed time if the international transaction log (the technical infrastructure ensuring international transfer of carbon credits) is not in place by then. The seller can usually only take these risks if the counterparty is deemed very reliable, as rated by international rating agencies.

Concerns

Exclusion of forest conservation/avoided deforestation from the CDM

The first commitment period of the Kyoto Protocol excluded forest conservation/avoided deforestation from the CDM for a variety of political, practical and ethical reasons. However, carbon emissions from deforestation represent 18-25% of all emissions , and will account for more carbon emissions in the next five years than all emissions from all aircraft since the Wright Brothers until at least 2025 . This means that there have been growing calls for the inclusion of forests in CDM schemes for the second commitment period from a variety of sectors, under the leadership of the Coalition for Rainforest Nations, and brought together under the Forests Now Declaration, which has been signed by over 300 NGOs, business leaders, and policy makers. There is so far no international agreement about whether projects avoiding deforestation or conserving forests should be initiated through separate policies and measures or stimulated through the carbon market. One major concern is the enormous monitoring effort needed in order to make sure projects are indeed leading to increased carbon storage. There is also local opposition. For example, May 2nd 2008, at the United Nations Permanent Forum on Indigenous Issues (UNPFII), Indigenous leaders from around the world protested against the Clean Energy Mechanisms, especially against REDDS.

The risk of false credits

As the CDM is an alternative to domestic emission reductions, the perfectly working CDM would produce no more and no less greenhouse gas emission reductions than without use of the CDM. However, it was recognized from the beginning that if projects that would have happened anyway are registered as CDM projects, then the net effect is an increase of global emissions as those "spurious" credits will be used to allow higher domestic emissions without reducing emissions in the developing country hosting the CDM project. Spurious credits may also occur because of overstated baselines. Such a rejection is termed a "false positive".

On the other hand, if a project is rejected because the criteria are set too high, there will be missed opportunities for emission reductions. Such a rejection is termed a "false negative". For example, if it costs $75 to remove just one tonne from a domestic power station in a developed country, while the same money would reduce 37.5 tonnes of emissions through a genuinely additional CDM project in China, it is important that the validation process does not become so bureaucratic or onerous as to dissuade the more effective option. Some observers report that the CDM process is producing far more of these false negatives than false positives.

NGOs have criticized the inclusion of large hydropower projects, which they consider unsustainable, as CDM projects. Lately, both the CDM EB and investors have become concerned about such projects for potential lack of additionality. One reason was that many of these projects had started well before applying for CDM status. In June 2008, third party validator TÜV SÜD Group rejected a hydropower project in China because the project proponents could not document that they had seriously considered CDM at the time the project was started. In July 2008, third party validators agreed that projects applying for CDM status more than one year after having taken their investment decision should not qualify for CDM status.

Hydropower projects larger than 20MW must document that they follow World Commission on Dams guidelines or similar guidelines in order to qualify for the European Union's Emissions Trading Scheme. As of 21 July 2008, CERs from hydropower projects are not listed on European carbon exchanges, because different member states interpret these limitations differently.

In the initial phase of the CDM, policy makers and NGOs were concerned about the lack of renewable energy CDM projects. As the new CDM projects are now predominantly renewables and energy efficiency projects, this is now less of an issue.

NGOs, as well as several governments, have consistently been sceptical towards the inclusion of sinks as CDM projects. The main reasons were fear of oversupply, that such projects cannot guarantee permanent storage of carbon, and that the methods of accounting for carbon storage in biomass are complex and still under development. Consequently, two separate carbon currencies (temporary CERs and long-term CERs) were created for such projects. Such credits cannot be imported to the European Union's Emission Trading Scheme. The lack of demand for such projects have resulted in very limited supply: Currently (21 July 2008), only one sinks project has been registered under CDM.

Significant volumes of CERs come from CDM projects at refrigerant-producing factories in non-Annex-1 countries (particularly China) that generate the powerful greenhouse gas HFC 23 as a by-product. By destroying the HFCs, the factories can earn carbon credits. Destroying the HFCs requires a simple and relatively cheap piece of equipment called a scrubber. The cost per CER can be lower than 1€. Critics say it would cost only €100 million to pay producers to capture and destroy HFC 23 compared with €4.6 billion in CDM credits, yielding what they believe are excessive profits to the sellers and middlemen [14][15][16]. Proponents respond that HFC 23 emissions were not abated in developing countries until CDM was introduced, and that in a well-functioning market rent is shared between buyer and seller, not held exclusively by one of the parties to a transaction. Critics have also highlighted that HFC 23 emitters can earn more from CDM credits than from selling refrigerant gases and that this a major distortion of the market. Proponents would agree that this was to some extent correct in the initial phase, but point to the fact that the regulation has been updated to make sure no carbon credits can be earned from expanding refrigerant production beyond what was already in place in 2002 [16]. Negotiators are currently discussing how to reduce as much Hydrofluorocarbon (HFC) emissions as possible under the CDM without creating a perverse incentive to build more HCFC-22 production facilities just to get the revenues from selling CDM credits. If this were to happen, developing countries' obligations to stabilise (2013) and phase out (2030) Hydrochlorofluorocarbons (HCFCs) would be in jeopardy.

Negotiators have not yet been able to agree on whether, or how, carbon capture and storage projects should be allowed under the CDM.

In response to concerns of unsustainable projects or spurious credits, the World Wide Fund for Nature and other NGOs devised a ‘Gold Standard’ methodology to certify projects that uses much stricter criteria than required, such as allowing only renewable energy projects.

For example, a South African brick kiln was faced with a business decision; replace its depleted energy supply with coal from a new mine, or build a difficult but cleaner natural gas pipeline to another country. They chose to build the pipeline with SASOL. SASOL claimed the difference in GHG emissions as a CDM credit, comparing emissions from the pipeline to the contemplated coal mine. During its approval process, the validators noted that changing the supply from coal to gas met the CDM's 'additionality' criteria and was the least cost-effective option. However, there were unofficial reports that the fuel change was going to take place anyway, although this was later denied by the company's press office.

CDM projects to date

File:CDM CERs distribution by project type.png

Distribution of CDM emission reductions, by project type.

As of 21 July 2008, 1128 projects have been registered by the CDM Executive Board as CDM projects These projects reduce greenhouse gas emissions by an estimated 220 million ton CO₂ equivalent per year. There are about 4,000 projects yet to be certified. These projects would reduce CO₂ emissions by over 2.5 billion tons until the end of 2012. However, the previous adoption rate suggests that only a fraction of these projects will be certified.

For comparison: The current emissions of the EU-15 are about 4.2 billion ton CO₂ equivalent per year. The majority of CERs issued so far have been from HFC destruction projects (see figure). However, there are only a limited number of such project sites globally, of which most if not all have already been converted into projects. The fastest-growing project types are renewable energy and energy efficiency.

Transportation

The BRT system in Bogota, TransMilenio, is the only public transport system registered for CDM with the UN Framework Convention on Climate Change.

References

• Voigt, Christina, "Is the Clean Development Mechanism Sustainable? Some Critical Aspects" . Sustainable Development Law & Policy, Vol. 7, No. 2, pp. 15-21, Winter 2008 Available at SSRN: http://ssrn.com/abstract=1145262

See also

• CDM Gold Standard
• ERU
• Flexible Mechanisms
• Mobile Emission Reduction Credit (MERC)
• UNFCCC

External links

• CDM Executive Board Official site of the UNFCCC CDM Executive Board, includes all formal decisions.
• CDM Pipeline Official database of the CDM EB containing all data about all the current CDM projects and their status. Direct link to the excel database.
• CDM Rulebook Most comprehensive site about the rules, practices and procedures surrounding the CDM.
• CDM Bazaar Official UNFCCC website which serves as a platform for exchange of information on CDM project opportunities between buyers and sellers.
• CDM-JI Quick Check form Eligibility testing for CDM/JI project ideas.
• CDM India Information on the implementation of CDM in India.
• IPCC IPCC third assessment report chapter 6.3.2.2 The Clean Development Mechanism .
• books.google.com Kyoto Protocol: A Guide and Assessment. Edited by Michael Grubb, Duncan Brack. ISBN 1-85383-581-1.
• jiq.wiwo.nl Foundation Joint Implementation Network has the JIQ newsletter with frequent commentary on the CDM.
• UNEP Risø Centre CD4CDM Publications, database.
• SinksWatch SinksWatch, an NGO concerned with environmental issues of sinks in general and the CDM in particular.
• Climate targets - should they be met at home or where it is cheapest?: the 'clean development mechanism' as generator of investment from inside the climate regime / Hans-Jochen Luhmann and Wolfgang Sterk, Friedrich-Ebert-Stiftung, International Policy Analysis, July 2008. Recent research paper by the Friedrich-Ebert-Stiftung.