Clean Development Mechanism

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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 (so-called Annex 1 countries) to invest in emission reducing projects in developing countries as an alternative to what is generally considered more costly emission reductions in their own countries.

In theory, the CDM allows for a drastic reduction of costs for the industrialised countries, while achieving the same amount of emission reductions as without the CDM. However, critics have long argued that emission reductions under the CDM may be fictive, and in early 2007 the CDM came under fire for paying €4.6 billion for destruction of HFC gases while according to a study this would cost only €100 million if funded by development agencies (see discussion below).

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).

Contents 1 History and Purpose 2 CDM project process 2.1 Outline of the project process 2.2 Establishing additionality 2.3 Establishing a baseline 3 Financial issues 4 2007 Controversy over excessive payments for emission reductions 5 Environmental concerns 6 CDM projects to date 7 References 8 See also 9 External links

[edit] History and Purpose

The CDM arose out of the negotiations of the Kyoto Protocol in 1997. The United States government desired that there be as much flexibility in achieving emission reductions as possible and desired a possibility of international emissions trading to achieve cost-effective emission reductions. During the time it was considered a controversial element and was opposed throughout 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, 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 1 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 let to a wide range of interpretations

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.

[edit] CDM project process

[edit] 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 it will contribute to sustainable development. Then, using methodologies approved by the CDM Executive Board (EB), the applicant (the industrialised country in our case) must make the case that the 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, a so-called Designated Operational Entity 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, so-called Certified Emission Reductions; CERs (one CER being equivalent to one metric tonne of CO₂ reduction), to project participants based on the monitored difference between the baseline and the actual emissions, verified by an external party called a DOE.

[edit] Establishing additionality

To avoid giving credits to projects that would have happened anyway, rules have been specified to ensure additionality of the project, i.e. to ensure that the project reduces emissions more than would have occurred in the absence of the registered CDM project activity. There are currently two important rivalling 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 that was under discussion during the negotiation of the Marrakech Accords and was rejected back then by the Parties. Investment Additionality carries the idea that any project that surpasses a certain risk-adjusted profitability threshold would automatically be deemed non-additional^[1]. 'Financial additionality' is often defined as an economically non-viable project becoming viable as a direct result of CDM revenues.

Many investors argue that the environmental additionality interpretation would make CDM simpler. Environmental NGOs have argued that this interpretation would open for free-riders and yield fewer credible emissions reductions.

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 of the common objections to CDM. Nevertheless, an educated guess can be made using the official guidelines^[2] set by the CDM Executive Board for assessing additionality.

[edit] Establishing a baseline

The amount of emission reduction, obviously, depends on the emissions that would have occurred without 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 ameliorate this potential problem.

[edit] 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. However, many CDM projects have led to excessive profits (see next section).

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 %^[3] 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 is not in place by then. These risks the seller can usually only take if it is a very reliable counterparty rated by international rating agencies.

[edit] 2007 Controversy over excessive payments for emission reductions

In early 2007 an issue that had by then already been known for a while^[4] erupted in major media ^[5][6]. A study published in Nature ^[7] found that the main type of CDM projects paid as much as 50 times more for the emission reductions than the costs alone would warrant, with the excessive profits ending up with the factories and the carbon traders.

The particular kind of CDM projects in question regard 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 CER credits. Destroying the HFCs requires a simple and relatively cheap piece of equipment called a scrubber; the author argues it would cost only €100 million to pay producers to capture and destroy HFC 23 compared with €4.6 billion in CDM credits. While this is still cheaper than the typical cost of reducing emissions in industrialised countries, it is seen as a major loophole in the carbon trading system and undermines the tenet of emission trading being as a cost-effective tool for reducing emissions. Also, "HFC 23 emitters can earn almost twice as much from the CDM credits as they can from selling refrigerant gases – by any measure a major distortion of the market," writes the author.

In response, Halldor Thorgeirsson, director of sustainable development mechanisms at the UNFCCC claims: "The idea of easy money is out of proportion." And he says the loophole is now closed and that new HFC 23 facilities will no longer be eligible for CDM credits.^[6]

[edit] Environmental concerns

The risk of spurious credits

As 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, the use of CDM will result in higher total emissions, as the spurious credits will be used to allow higher domestic emissions while not delivering lower emissions in the developing country hosting the CDM project. Similarly, spurious credits may be awarded through overstated baselines.

The NGO CDM Watch argues that a majority of the CDM projects so far (2005) would have happened anyway, referring among other reasons to project activities completed before final approval as CDM projects, and arguing that these would be viable without the CDM financing, and therefore non-additional.

NGOs have also criticized the inclusion of large hydropower projects as CDM projects which they deem unsustainable. Other concerns are the lack of renewable energy CDM projects and the inclusion of sinks^[8] as CDM projects.

Negotiators have so far not been able to agree on whether and if so how carbon capture and storage projects should be allowed under the CDM. They are also discussing how to reduce as much 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, the developing countries obligations to stabilise (2016) and phase out (2040) HCFC-22 would be in jeopardy.

In response to concerns of unsustainable projects or spurious credits, the World Wide Fund for Nature and other NGOs devised a ‘Gold Standard’^[9] methodology for certifying projects that used much stricter criteria than required, such as allowing only renewable energy projects.

[edit] CDM projects to date

As of 21 February 2007, 513 projects had been registered by the CDM Executive Board as CDM projects ^[10] These projects reduce greenhouse gas emissions by an estimated 114 million ton CO₂ equivalent per year. All 1450 projects in the pipeline (most of which not yet registered) would until the end of 2012 produce over 1.8 billion tons CO₂ equivalent reductions. For comparison: The current emissions of the EU-15 are about 4.2 billion ton CO₂ equivalent per year^[11]. Of the registered projects in the current pipeline, the majority of CERs have been from HFC destruction projects (see figure), a loophole in the CDM (see discussion above).

[edit] References

[edit] See also

• Kyoto protocol
• Flexible Mechanisms
• UNFCCC

[edit] External links

• UNFCCC CDM official website.
• UNFCCC CDM rules Official rules and procedures governing the CDM.
• IPCC IPCC third assessment report chapter 6.3.2.2 The Clean Development Mechanism .
• cdmwatch.org CDM Watch, an NGO concerned with environmental issues of the CDM.
• 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.