In my recent post on getting wealthy countries to pay for reducing carbon emission reductions in developing countries I didn’t mention that a scheme close to that proposed already exists under the Kyoto Protocol. This is the Clean Development Mechanism. I draw heavily on an excellent wikipedia post in preparing these notes on CDM.
The CDM. CDM allows industrialised countries with a greenhouse gas reduction commitment to invest in emission reducing projects in developing countries as an alternative to making costly emission reductions at home. In theory the CDM allows for a drastic reduction of costs for industrialised countries, while achieving the same emission reductions. However, critics argue that emission reductions under the CDM may be fictive – 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.
The CDM arose out of the negotiations of the Kyoto Protocol in 1997. The US wanted flexibility in achieving emission reductions. Eventually, and largely on US insistence, CDM and two other flexible mechanisms (emissions trading and joint implementation) were written into Kyoto.
Determining baselines and additionality. An industrialized country seeking credits from a CDM project must obtain the consent of the developing country hosting the project that it will contribute to sustainable development. Then, the applicant must make the case that the project would not have happened anyway – it must establish additionality - and provide a baseline of future emissions in absence of the registered project. The emission reduction depends on the emissions that would have occurred without the project.
With costs of emission reduction typically much lower in developing countries than in industrialised countries, emission reduction targets in industrial countries can be received 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 to between 0.13-0.81 % of GDP versus 0.31 to 1.50 % with only domestic action.
Excessive profits. However, many CDM projects have led to excessive profits. In early 2007 a study 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 CDM projects in question involved refrigerant-producing factories in developing countries that generated the powerful greenhouse gas HFC 23 as a by-product. By destroying the HFCs, the factories earn CER credits worth €4.6 billion. But a simple and relatively cheap piece of equipment (a scrubber) would cost only €100 million to destroy HFC 23. While the CER credits are cheaper than the typical cost of reducing emissions in industrialized countries this anomaly is seen as a major loophole in the carbon trading system. The HFC 23 emitters can earn almost twice as much from the CDM credits as they can from selling refrigerant gases. The UN claims this loophole is now closed.
Environmental concerns with CDM. There are also environmental concerns. 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 the CDM. But 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. CDM Watch argues that a majority of the CDM projects up to 2005 would have happened anyway.
NGOs have also criticized the inclusion of unsustainable hydropower projects, of sinks and the exclusion of renewable energy projects as CDM projects.
Getting developing countries involved in carbon trading. Within CDM the United Nations Development Program (UNDP) have recently announced the MGD Carbon Facility to help developing countries conceive projects intended to reduce emissions of greenhouse gases. The idea is to get developing countries to the point of being able to operate in international carbon markets. The insurance giant Fortis will purchase, and sell-on, the emissions-reduction credits generated by projects and use the proceeds to finance investment and to promote development.
The MDG Carbon Facility will operate within the framework of the CDM and Joint Implementation, the market-based mechanisms under the Kyoto Protocol that allow developed countries to meet their compliance targets by financing projects in developing countries that contribute to reducing greenhouse-gas emissions.
The CDM has been at the center of a rapidly expanding, billion-dollar international market for carbon credits. However, early signs indicate that the CDM is unlikely to deliver the broad-based benefits that many hoped it would, at least in the near to medium term. CDM projects have so far been limited in geographic reach, and focused primarily on 'end-of-pipe' technologies that generate limited benefit for long-term sustainable development.
By expanding the CDM's presence into countries and regions previously considered inaccessible to carbon finance, the MDG Carbon Facility will help people in these areas acquire the resources and knowledge to take greater control over their future environment and development paths.
Once a developing country gains proficiency in carbon finance, in attracting private-sector investment and in developing project technologies that deliver longer-term development benefits, the MDG Carbon Facility will exit that market. It will have accomplished its market transformation objectives and no longer needing to play its role as a bridge between developing countries and the global carbon market.