Clean Development Mechanisms or CDMs are greenhouse gas (GHG) emission reduction programs under the United Nations Framework Convention on Climate Change (UNFCCC). CDMs facilitate investments by developed countries in climate change mitigation projects in developing countries through “certified emission reduction credits” (CER).
CDMs are one way in which the UNFCCC helps countries committed to the second round of the Kyoto Protocol (which include the 28 EU member states, Australia, Belarus, Iceland, Kazakhstan, Liechtenstein, Norway, Switzerland and Ukraine) reach their reduction targets, while also encouraging low-carbon development in developing nations. In the second commitment period of the Kyoto Protocol, Parties to the protocol committed to reducing their GHG emissions by at least 18% below 1990 levels between 2013 and 2020.
Types of CDM projects
Since the CDM project initiation in 2006, it has already “registered more than 1,650 projects and with CERs amounting to more than 2.9 billion tonnes of CO2 equivalent in the first commitment period of the Kyoto Protocol.” High level CDM project categories include renewables, CH4 reduction-cement-and coal mine/bed, supply side energy efficiency, fuel switch, demand side energy efficiency, afforestation and reforestation, transport, and HFCs-PFCs-SF-NO2 reduction. 71% of projects are renewables with wind capturing the most number of projects followed by hydro. An example of a CDM project could be a rural electrification project using solar panels, the installation of more energy-efficient boilers, or projects that destroy the very potent greenhouse gas HFC-23 in HCFC-22 facilities (which became controversial as firms in India and China were producing more HFC-23 than is necessary in order to get paid to destroy it, which proved more profitable).
How it Works
CERs representing one tonne of carbon dioxide equivalent are issued by the CDM Executive Board and can then be sold to developed countries. For a project to have CERs issued, it is required to follow methodology approved by the Board. CERs are only issued after the estimated volume of CO2 reduction has been validated by certified auditors and process is in place for monitoring. These credits assist in meeting developed countries’ reduction targets under the Kyoto Protocol. However, buyers of CERs range from public and private utilities, oil companies, investment banks, government programmes and institutional and private hedge funds. CERs can be purchased directly or through brokers for already issued CERs, CERs that are in progress, and secondary market CERs through a bank or a fund.
From 2013 onward, 36 countries, 11 sub-national jurisdictions in the United States and Canada, and seven cities and provinces in China are participating or preparing to participate in emissions trading systems. Depending on the price of credits in these systems, entities can be incentivized to purchase CERs from developing countries. According to the UNEP, China, India and Brazil make up the largest percentage of CERs produced worldwide. 2012 UNEP data also shows that 81.5% of CDM projects took place in the Asia Pacific region followed by Latin America at 13.3%. In Asia 55% of 2012 CDM projects were in China, 29.4% in India. In Latin America 34% of projects in the region were in Brazil, 18% in Mexico, 10% in Chile.
Why is the CDM system significant?
The CDM market has been praised by supporters since it encourages investment in low-cost strategies for controlling emissions and helps developing countries implement low-carbon development strategies. Yet CDM markets have largely been ineffective and have had many criticisms ranging from inadequately representing genuine reductions, bringing down emission permit prices, and creating a price gap between credits and emission permits.
Furthermore, the CDM mechanism requires approved projects to be “additional,” meaning that the project should only receive carbon credits if it could not be built without the financing from the CDM (i.e. they were not projects that were going to be built anyway with or without the CDM). This is because projects that would have been built anyway would not reflect actual emissions reductions. Unfortunately, there are estimates that 20-70% of all CDM projects have been non-additional, which allows industrialized countries to emit more assuming the equivalent amount of emissions are being reduced in a developing country although in reality projects are just business-as-usual.
Establishing baselines have also been a problem in determining CERs. Baseline emissions reflect what emissions would have been if a proposed project was not implemented. Yet in many cases project developers artificially increase baseline emissions to get more credits, distorting the amount of actual reductions. The example of firms in India and China producing more HFC-23 in order to be paid by the CDM to destroy it illustrates the concerns of additionality and baselines in the CDM market.
Other non-logistical criticisms of the CDM system are that it brings down emission permit prices in developed nations and creates price gaps. Low prices for CERs do not reflect the actual price and the excess supply of CDM projects has reduced the price of emission permits, decreasing the incentives for new technology to be developed and implemented.
Using the CDM market in Kyoto’s second commitment period
The EU emissions trading program has decided only to accept CDM credits from least developed countries in an attempt to ensure adequate accounting of reductions and to correct distortions brought on by excessive supply of CDM projects. The EU also banned the use of HFC-23 CERs from being used as credits in the post-2012 emission trading system.
Although the CDM system has weaknesses, it can play a vital role in furthering engagement in a mutually beneficial way between developed and developing countries in regards to climate change. As the market evolves and stakeholders address weaknesses, the potential increases further.