Asia Carbon Connections

The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol allowing industrialised countries with a greenhouse gas reduction commitment (called Annex 1 countries) to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. The most important factor of a carbon project is that it establishes that it would not have occurred without the additional incentive provided by emission reductions credits.

The CDM allows net global greenhouse gas emissions to be reduced at a much lower global cost by financing emissions reduction projects in developing countries where costs are lower than in industrialized countries. 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).

The CDM was an important feature of the negotiations leading up to the Kyoto Protocol. Some governments desired flexibility in the way that emission reductions could be achieved and proposed international emissions trading as a way of achieving cost-effective emission reductions. At the time it was considered a controversial element and was opposed 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. Eventually the 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.

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) must make the case that the carbon 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, called a Designated Operational Entity (DOE), 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, called Certified Emission Reductions (CERs, commonly known as carbon credits, where each unit is equivalent to the reduction of one metric tonne of CO2e, e.g. CO2 or its equivalent), to project participants based on the monitored difference between the baseline and the actual emissions, verified by the DOE.

To avoid giving credits to projects that would have happened anyway rules have been specified to ensure additionality of the project, that is, to ensure the project reduces emissions more than would have occurred in the absence of the project. There are currently two rival interpretations of the additionality criterion:

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.

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.

1 The Kyoto Protocol is an agreement made under the United Nations Framework Convention on Climate Change (UNFCCC). Countries that ratify this protocol commit to reduce their emissions of carbon dioxide and five other greenhouse gases, or engage in emissions trading if they maintain or increase emissions of these gases. The Kyoto Protocol now covers more than 170 countries globally and more than 60% of countries in terms of global greenhouse gas emissions. As of December 2007, the US and Kazakhstan are the only signatory nations not to have ratified the act. This treaty expires in 2012, and international talks have now been initiated, the Bali roadmap, on a future treaty to succeed the current one.

2 The United Nations Framework Convention on Climate Change (UNFCCC or FCCC) is an international environmental treaty produced at the United Nations Conference on Environment and Development (UNCED), informally known as the Earth Summit, held in Rio de Janeiro in 1992. The treaty is aimed at reducing emissions of greenhouse gas in order to combat global warming.

3 Flexible mechanisms, also sometimes knows as Flexibility Mechanisms or Kyoto Mechanisms), refers to Emissions Trading, the Clean Development Mechanism and Joint Implementation. These are mechanisms defined under the Kyoto Protocol intended to lower the overall costs of achieving its emissions targets. These mechanisms enable Parties to achieve emission reductions or to remove carbon from the atmosphere cost-effectively in other countries. While the cost of limiting emissions varies considerably from region to region, the benefit for the atmosphere is in principle the same, wherever the action is taken.