Clean Development Mechanism (CDM)
The CDM allows emission-reduction projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2. These CERs can be traded and sold, and used by industrialized countries to a meet a part of their emission reduction targets under the Kyoto Protocol.
The mechanism stimulates sustainable development and emission reductions, while giving industrialized countries some flexibility in how they meet their emission reduction limitation targets.
The CDM is the main source of income for the UNFCCC (United Nations Framework Convention on Climate Change) Adaptation Fund, which was established to finance adaptation projects and programmes in developing country Parties to the Kyoto Protocol that are particularly vulnerable to the adverse effects of climate change. The Adaptation Fund is financed by a 2% levy on CERs issued by the CDM.
CDM projects to date
Since 2000, the CDM has allowed crediting of project-based emission reductions in developing countries (Gupta et al., 2007). By 1st January 2005, projects submitted to the CDM amounted to less than 100 MtCO2e of projected savings by 2012 (Carbon Trust, 2009, p. 18-19). The EU ETS started in January 2005, and the following month saw the Kyoto Protocol enter into force. The EU ETS allowed firms to comply with their commitments by buying offset credits, and thus created a perceived value to projects. The Kyoto Protocol set the CDM on a firm legal footing.
Companies and countries initially came forward with projects to reduce industrial gases, notably hydrofluorocarbon-23 (HFC-23) and nitrous oxide (N2O). Some concerns were raised about these projects (Carbon Trust, 2009, p. 19). HFC-23 is a potent greenhouse gas (GHG) and is a by-product of producing HCFC-22. The scale of the profits generated from CDM credits could have made it profitable to build whole new facilities just for the value of destroying the by-product (Carbon Trust, 2009, p. 60;
Industrial gas projects, like those limiting HFC-23 emissions, are expected to contribute 20% of the CDM reduction in emissions to 2012 (Carbon Trust, 2009, p. 60). By the end of 2008, over 4,000 CDM projects had been submitted for validation, and of those, over 1,000 were registered at the CDM Executive Board, and were therefore entitled to generate CERs (Carbon Trust, 2009, p. 19). The initial reductions of industrial gas projects included large contributions from South Korea and Brazil, which were then followed by India and China.
As of 23 March 2010, 2099 projects have been registered by the CDM Executive Board as CDM projects.
IGES CDM Project Database
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 A emissions information] European Environment agency. 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.
By 2012, the largest potential for production of CERs are estimated in China (52% of total CERs) and India (16%) (World Bank, 2010, p. 262). CERs produced in Latin America and the Caribbean make up 15% of the potential total, with Brazil as the largest producer in the region (7%).
The BRT system in Bogota, TransMilenio, and the Delhi Metro are the only two public transport system registered for CDM with the UNFCCC.
Destruction of HFC-23, a byproduct from the production of HCFC-22 refrigerant gas.
Many CDM projects have been initiated around the world for the destruction of HCFC-23. An example is that of a Plascon, Plasma arc plant that was installed by Quimobásicos S.A. de C.V in Monterrey, Mexico to eliminate of HCFC-23, a byproduct of the production of R-22 refrigerant gas.
World Bank (n.d., p. 12) described a number of barriers to the use of the CDM in least developed countries (LDCs). LDCs have experienced lower participation in the CDM to date. Four CDM decisions were highlighted as having a disproportionate negative impact on LDCs:
1. Suppressed demand: Baseline calculations for LDCs are low, meaning that projects cannot generate sufficient carbon finance to have an impact.
2. Treatment of projects that replace non-renewable biomass: A decision taken led to essentially a halving in the emission reduction potential of these projects. This has particularly affected Sub-Saharan Africa and projects in poor communities, where firewood, often from non-renewable sources, is frequently used as a fuel for cooking and heating.
3. Treatment of forestry projects and exclusion of agriculture under the CDM: These sectors are more important for LDCs than for middle-income countries. Credits from forestry projects are penalized under the CDM, leading to depressed demand and price.
4. Transaction costs and CDM process requirements: These are geared more towards the most advanced developing countries, and do not work well for the projects most often found in LDCs.
Industrial gas projects
Some CERs are produced from CDM projects at refrigerant-producing factories in non-Annex I countries that generate the powerful greenhouse gas HFC 23 as a by-product. These projects dominated the CDM's early growth, and are expected to generate 20% of all credited emission reductions by 2012 (Carbon Trust, 2009, p. 60). Paying for facilities to destroy HFC-23 can cost only 0.2-0.5 €/tCO2. Industrialized countries were, however, paying around 20 €/tCO2 for reductions that cost below 1 €/tCO2. This provoked strong criticism.
The scale of profits generated by HFC-23 projects threatened distortions in competitiveness with plants in industrialized countries that had already cleaned up their emissions (p. 60). In an attempt to address concerns over HFC-23 projects, the CDM Executive Board made changes in how these projects are credited. According to the Carbon Trust (2009, p. 60), these changes effectively ensure that:
• the potential to capture emissions from these plants is exploited;
• distortions are reduced;
• and the risk of perverse incentives is capped.
Critics of the CDM have stated that 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. Carbon Trust (2009, p. 60) argued that criticizing the CDM for finding low-cost reductions seemed perverse. They also argued that addressing the problem with targeted funding was easy with hindsight, and that before the CDM, these emission reduction opportunities were not taken.
Another argument in favour of the CDM is that in a well-functioning market, rent is shared between buyer and seller, not held exclusively by one of the parties to a transaction.
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 20 MW 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.
Carbon capture and storage
Negotiators have not yet been able to agree on whether, or how, carbon capture and storage projects should be allowed under the CDM, although the technical barriers to successfully implementing this technology delay the need for a decision on this.
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.
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