Clean Development Mechanism

Introduction

The Clean Development Mechanism (CDM) is an arrangement defined by the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC), an international treaty designed to fight greenhouse warming. The CDM allows wealthier nations to earn credits toward their greenhouse-gas reduction goals by funding projects in developing (poorer, less technologically and industrially advanced) countries that will reduce greenhouse-gas emissions overall.

The reasoning behind the CDM is that projects to reduce greenhouse emissions will be cheaper to implement in developing countries, but the money to fund such projects will be found mostly in developed countries. Since it makes no difference where a ton of carbon dioxide (CO₂) or other greenhouse gas is kept out of the atmosphere, the CDM seeks to match funds with reduction opportunities so as to produce a cost-effective greenhouse abatement strategy.

Most CDM projects are in India, China, and Latin America. About 60% of CDM funds went to projects in China in 2006. Critics have argued that some of the claims for emissions reductions under the program are exaggerated; others have stated that Africa is under-served by the program. Still others are opposed to the concept of carbon credits, which, they say, among other faults, allow business as usual to continue in industrialized countries where deep cuts in greenhouse emissions need to be made.

Historical Background and Scientific Foundations

Scientific understanding of global warming began to solidify in the late 1970s and 1980s. In response, member states of the United Nations negotiated the UNFCCC in 1992. This treaty committed its signatories to create national and regional programs containing measures to reduce global warming by decreasing emissions of greenhouse gases and enhancing removal of those gases from the atmosphere by various carbon sinks (for example, forests).

However, the 1992 version of the treaty did not establish any specific arrangements for these programs. This was remedied by negotiations over the next several years. In 1997, the Kyoto Protocol was drafted, an add-on to the UNFCCC that would have to be signed again by each UNFCCC participant wishing to participate.

The UNFCCC divided the world's countries into three groups—Annex I, Annex II, and developing. Developing countries were relatively poor, having only partly industrialized economies. Annex I countries were fully industrialized. Annex II countries were the most prosperous Annex I countries (members of the Organisation for Economic Co-operation and Development), who would contribute funds to pay for emissions reductions in developing countries. Under the protocol, the Annex I countries committed to reducing their greenhouse emissions by 2012 to 5.2% below 1990 levels. A violator would face stiffer reductions requirements under whatever follow-up to the Kyoto Protocol would govern the period after 2012.

Under Article 12 of the Kyoto Protocol, Annex I countries (or companies based in them) can pay for projects in developing countries that reduce greenhouse emissions or enhance carbon sinks. In exchange, the Annex I country that funds such a project receives a certain amount of carbon credits, termed Certified Emission Reductions (CERs). The more carbon that is kept out of the atmosphere, the more CER carbon credits are earned.

Carbon credits are fiscal instruments, abstract objects, like dollars, euros, or stock shares, that have an arbitrarily agreed-upon value. The agreed-upon value of a single carbon credit is 1 metric ton of CO₂ equivalent, that is, either 1 ton of actual CO₂ or an amount of some other greenhouse gas, such as methane, that would cause as much global warming as 1 ton of CO₂. The Kyoto Protocol defined several types of carbon credit, of which the CER is one.

All carbon credits allow the possessor, whether a country or a private party, to emit 1 ton of carbon dioxide. In addition, the sum of carbon credits and emitted tonnage is fixed. Funding a CDM project that produces, say, 10,000 carbon credits (prevents the release of 10,000 tons of CO₂ or an equivalent amount of some other greenhouse gas) generates 10,000 new credits (CERs).

The funding country or company owns the credits and can apply them toward its own treaty commitment to reduce emissions by 5.2% below 1990 levels by 2012. Ideally, the nation receiving the funding for the CDM project benefits from the project as a form of sustainable development. For example, consider a biomass-energy project in Pagara, India, that registered with the CDM managerial structure on October 23, 2005. The project involved the construction of an electric power plant for Deepak Spinners Limited, a company that manufactures a synthetic blended yarn of polyester, viscose, and acrylic. The power plant would supply power to the yarn factory not from fossil fuel, but from soya crop wastes, bagasse (the biomass remaining after sugar cane processing), and wheat chaff. Biomass of this type does not, ideally, contribute new CO₂ to the atmosphere, but simply returns CO₂ that the plants recently removed. The project was designed to displace the release of 17,424 metric tons of CO₂ per year. Therefore, those who funded the project (in this case, the governments of Germany and Italy) were to earn 17,424 CER carbon credits per year.

Germany or Italy can apply its share of the 17,424 CERs earned from the Pagara project to meeting their Kyoto emissions reductions commitment. It is also possible that they can earn money by selling their credits on the European carbon-credits market. This is permitted under Kyoto if the country acquiring the CER is already meeting its Kyoto emissions limit. The cost of a CER earned from the Pagara project is probably, even counting overhead, far below the 2007 market price of a carbon credit on the European carbon market, namely around 20 euros (US$28). By selling the carbon credit, the Annex I country would, in this case, make a profit.

As of 2007, CERs were already being traded on the European market. However, freely exchanging CERs will not be possible until the computerized system called the International Transaction Log comes online. The ITL will permit CERs to be exchanged on the carbon market along with five other types of Kyoto-defined carbon credits (called “Kyoto units” by the UNFCCC secretariat).

Impacts and Issues

WORDS TO KNOW

BIOMASS: The sum total of living and once-living matter contained within a given geographic area. Plant and animal materials that are used as fuel sources.

CARBON CREDIT: A unit of permission or value, similar to a monetary unit (e.g., dollar, euro, yen) that entitles its owner to emit one metric ton of carbon dioxide into the atmosphere.

CARBON SINK: Any process or collection of processes that is removing more carbon from the atmosphere than it is emitting. A forest, for example, is a carbon sink if more carbon is accumulating in its soil, wood, and other biomass than is being released by fire, forestry, and decay. The opposite of a carbon sink is a carbon source.

FOSSIL FUELS: Fuels formed by biological processes and transformed into solid or fluid minerals over geological time. Fossil fuels include coal, petroleum, and natural gas. Fossil fuels are non-renewable on the timescale of human civilization, because their natural replenishment would take many millions of years.

GREENHOUSE GASES: Gases that cause Earth to retain more thermal energy by absorbing infrared light emitted by Earth's surface. The most important greenhouse gases are water vapor, carbon dioxide, methane, nitrous oxide, and various artificial chemicals such as chlorofluorocarbons. All but the latter are naturally occurring, but human activity over the last several centuries has significantly increased the amounts of carbon dioxide, methane, and nitrous oxide in Earth's atmosphere, causing global warming and global climate change.

KYOTO PROTOCOL: Extension in 1997 of the 1992 United Nations Framework Convention on Climate Change (UNFCCC), an international treaty signed by almost all countries with the goal of mitigating climate change. The United States, as of early 2008, was the only industrialized country to have not ratified the Kyoto Protocol, which is due to be replaced by an improved and updated agreement starting in 2012.

METHANE: A compound of one hydrogen atom combined with four hydrogen atoms, formula CH₄. It is the simplest hydro-carbon compound. Methane is a burnable gas that is found as a fossil fuel (in natural gas) and is given off by rotting excrement.

SUSTAINABLE DEVELOPMENT: Development (i.e., increased or intensified economic activity; sometimes used as a synonym for industrialization) that meets the cultural and physical needs of the present generation of persons without damaging the ability of future generations to meet their own needs.

According to the UNFCCC secretariat, as of late 2007 over 2,600 CDM projects had entered the validation process. Each CDM project undergoes a searching evaluation that involves site visits, interviews, and audits of the accounts of participants in the developing country where the project is to take place. Follow-up validation visits are also made. If all are approved, these 2,600+ projects are scheduled to generate 2.5 billion CERs by the end of 2012, that is, to reduce by 2.5 billion tons the amount of carbon dioxide that would otherwise be in the atmosphere by that time. (Global human CO₂ emissions are about 27 billion metric tons per year as of 2007.)

Some CDM projects have been criticized for enriching the already rich. For example, one chemical factory in China was outfitted with a $5 million incinerator to destroy HFC-23, a refrigerant chemical that is far more effective at causing global warming, ton for ton, than CO₂. Because the greenhouse mitigation to be realized from the project was so great, the foreign firms paying for the incinerator were actually charged $500 million for the CERs generated by the project. The $495 million difference was split by the factory's owners and by a group of consultants and bankers in London. By comparison, only $150 million of CDM funding went to all of Africa in 2006. Citing such questionable deals, Canada withdrew its share of funding for the CDM aspect of the Kyoto mechanism in September 2006. The United States never ratified the Kyoto Protocol and does not participate in any of its mechanisms.

Despite criticism of the CDM, most of the world's countries continue to participate in the young program (which only began operations after the Kyoto Protocol entered into force in 2005). The CDM program has grown rapidly since its inception, with $4.8 billion in transfer payments made in 2006 alone. Growth in CDM projects continued to be rapid in 2007, with the European market for carbon credits generated by such projects surging in anticipation of the International Transaction Log. If successful on a large scale, the CDM may blunt one of the most common criticisms of the Kyoto Protocol, namely, that it imposed no caps on the emissions of the developing countries, which are growing much more rapidly than those of the Annex I countries. In the summer of 2007, the UNFCCC secretariat, World Bank, and African governments held a conference in Nairobi, Kenya, with the goal of increasing African participation in the CDM mechanism.

Primary Source Connection

The following source discusses Clean Development Mechanism (CDM) policy under the United Nations Framework Convention on Climate Change (UNFCCC). Annex I parties and countries are a group consisting of all the developed countries within the Organization of Economic Co-operation and Development, and several economies in transition. At the inception of the UNFCCC, Annex I parties included most of the nations of Europe, Canada, Australia, New Zealand, and the United States. In recent years, more Annex I parties have been added by amendment.

POLICIES, MEASURES, AND INSTRUMENTS …6.3.2.2 The Clean Development Mechanism (Article 12)

The purposes of the CDM are to assist non-Annex I Parties to achieve sustainable development and to contribute to the ultimate objective of the Convention while assisting compliance by Annex I Parties…. The CDM allows a project to reduce emissions, or possibly to enhance sinks, in a country without a national commitment to generate certified emission reductions (CERs) equal to the reduction achieved. Annex I Parties can use CERs to meet national emissions limitation commitments. In contrast to JI, for which there is little peer-reviewed literature, the literature is rapidly growing on the CDM.

A process for independent review of the certification of the emission reductions achieved is necessary for the credibility of the CDM. Article 12.4 establishes an executive board for the CDM and Article 12.5 specifies that emission reductions must represent real, measurable, and long-term benefits related to the mitigation of climate change and be certified by designated operational entities. The certification process and the respective roles of the operational entities and the executive board remain to be defined, but they will be critical.

The host government must approve proposed CDM projects. As part of its approval process it will need to assess whether the proposed project contributes to sustainable development. Some Parties have proposed criteria or procedures that the host government be required to follow when determining whether a project contributes to sustainable development of the country.

Investments in CDM projects by Annex I governments could lead to a reduction in their official development assistance (ODA). The effect of government investment in CDM projects on the level of ODA will be difficult to determine since the level of ODA in the absence of CDM projects is unobservable. However, historical figures compiled by the OECD Development Assistance Committee could be used to try to deal with this.

Article 12.8 specifies that a share of the proceeds from CDM projects will be used to cover administrative expenses and to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation. Articles 6 and 17 do not impose a comparable levy on JI projects or international transfers of AAUs, although a number of developing countries have proposed that the levy be applied to all three mechanisms.

CDM projects can begin to create CERs upon ratification of the Kyoto Protocol. The advantage is that it supports developing countries obtaining access to cleaner technologies earlier. It means that a supply of CERs should be available prior to the start of the 2008 to 2012 commitment period when they can be used by Annex I Parties. Parkinson et al. (1999) argue that creation of CERs during 2000 to 2007, which are credited towards 2008 to 2012 compliance, increases the emissions trajectories of Annex I countries for 2000 to 2012. They estimate that increased Annex I emissions offset 30-60% of the CERs created during 2000 to 2012.

Some analysts argue that the CDM facilitates the transfer of CERs from low-cost emission reduction actions to Annex I investors when they might subsequently be needed by the host government to meet a future emissions limitation commitment. However, this assumes a fixed stock of emission reduction actions. In practice, the stock of possible emission reduction (or possibly sink enhancement) actions changes over time in response to turnover of the capital stock, technological change, and other developments. Rose et al. (1999) analyzes the optimal strategy for a host government given a dynamic stock of potential projects.

Numerous issues related to implementation of the CDM remain to be negotiated, including:

• host and project eligibility;
• eligibility of sequestration actions;
• demonstrating contribution to sustainable development;
• project financing arrangements;
• monitoring, verification, and reporting requirements;
• baseline establishment;
• CER certification, registry, and trading conditions;
• the share of proceeds for administrative expenses and adaptation assistance;
• adaptation assistance fund administration;
• supplementarity provisions;
• executive board composition and responsibilities;
• process for designation of operational entities; and
• penalties for non-compliance.

ipcc. “policies, measures, and instruments” climate change 2001: mitigation, ch. 6. < http://www.grida.no/climate/ipcc_tar/wg3/index.htm> (accessed november30, 2007).

See Also Carbon Credits; Emissions Trading; Kyoto Protocol.

BIBLIOGRAPHY

Periodicals

Bradsher, Keith. “Clean Power that Reaps a Whirlwind.” The New York Times (May 9, 2007).

Bradsher, Keith. “Outsize Profits, and Questions, in Effort to Cut Warming Gases.” The New York Times (December 21, 2006).

Yamaguchi, Mitsutsune. “CDM Potential in the Power-Generation and Energy-Intensive Industries of China.” Climate Policy 5 (2005): 167–184.

Zegras, P. Christopher. “As If Kyoto Mattered: The Clean Development Mechanism and Transportation.” Energy Policy 35 (2007): 5136–5150.

Web Sites

“Clean Development Mechanism.” United Nations Framework Convention on Climate Change Secretariat, June 22, 2007. < http://unfccc.int/kyoto_protocol/mechanisms/clean_development_mechanism/items/2718.php> (accessed November 2, 2007).

Larry Gilman