The Clean Development Mechanism
One unexpected outcome of the Third Conference of the Parties to the United Nations Framework Convention on Climate Change was the creation of the Clean Development Mechanism as a potential means of partnership between North and South.
In this article, extracted from a discussion document prepared for the workshop New Partnerships for Sustainable Development: the Clean Development Mechanism under the Kyoto Protocol held in New Delhi, India, in May 1998, Julia Curtis of the International Energy Agency (based in France) and Malik Amin Aslam from ENVORK (Pakistan) describe the background to the Clean Development Mechanism and the rationale for this new concept.
The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) was formally adopted by the third session of the Conference of the Parties (COP 3) on 11 December 1997 in Kyoto, Japan. The Protocol establishes a legally binding obligation on Annex I countries (subject to entry into force) to reduce emissions for six greenhouse gases (GHGs) in total by about 5.0% below 1990 levels by the years 2008-2012 (Article 3). The developing countries did not agree to any similar commitments.
Provisions for international cooperation in meeting emission-reduction commitments are a novel and critical feature of the Kyoto Protocol. Six greenhouse gases are covered, not only carbon dioxide which accounts for the vast majority of emissions, but also methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons and sulphur hexafluoride. An important element of the Protocol lies in the adoption of a five-year commitment period, rather than a target set for a single year. Annex I countries may thus take actions when it is most convenient and cost-effective to do so.
The Annex I Parties agreed to differentiated reductions — including 8% for the European Union, 7% for the United States, 6% for Canada, Japan, Hungary and Poland, and 5% for Croatia. Russia and Ukraine promised to stabilise at 1990 levels, while Norway, Australia and Iceland were allowed increases of 1, 8 and 10% respectively. Net reductions in emissions achieved by changes in land use and forestry activities undertaken since 1990 are counted against national targets.
The promotion of environmentally sustainable economic growth requires providing and expanding energy services while simultaneously reducing their energy and greenhouse gas content (particularly carbon dioxide). The International Energy Agency has been analysing market dynamics, the rigidity of infrastructures and attitudes, and the rate of capital stock turnover, which define the basic parameters of viable response options, pointing both to certain limitations and significant opportunities. The United Nations Environment Programme has been studying possible policies for assessing environmentally sustainable technologies, as well as how to implement barrier removal.
The current trend in energy market de-regulation can provide a more level playing field. This may not promote lower GHG emissions in all cases; yet it will provide a more cost-effective basis for actions aimed at reducing GHGs. A stable, transparent, and level playing field, though difficult to ensure, is essential in creating clear market signals and allowing new climate-friendly technologies to be selected through commercial decision making.
The growing share of non-Annex I countries’ global GHG emissions implies that actions should be taken together where possible to promote sustainable development. In particular, rapid infrastructure growth in developing countries provides important opportunities for co-operative actions, including through technology diffusion and voluntary agreements, labels and standards, and programmes and mechanisms such as Activities Implemented Jointly. Choosing the right path for development at the outset could provide the opportunity to avoid extra costs in adapting the system at a later date.
The Clean Development Mechanism (CDM) allows non-Annex I countries to benefit from project activities resulting in certified emission reductions which can be used by Annex I Parties to contribute to compliance with the Kyoto Protocol. The CDM would allow Annex I countries to work with other countries to reduce emissions through projects consistent with local development needs, and gain credits from such actions. The mechanics of the CDM are still to be defined; however, Article 12.7 states that the COP serving as the Meeting of the Parties (MOP) to the Protocol (i.e. after entry into force) will “at its first session, elaborate modalities and procedures with the objective of ensuring transparency, efficiency and accountability through independent auditing and verification of project activities.”
The CDM can be termed a mechanism which helps address the issues of global climate change through a market-based concept.
The CDM can assist in arranging funding of certified project activities. Certified emission reductions (CERs) obtained during the period from 2000 to the start of the first commitment period in 2008 can be used to assist in achieving compliance (sometimes called “early crediting”). CERs can provide additional financial flows and technology diffusion to developing countries.
Other pertinent aspects of the CDM include the following:
- It encourages and permits the active participation of both private and public sectors.
- The emission reductions will have to meet the criteria for additionality, with real, measurable and long-term benefits for climate change mitigation.
- Operational entities can be designated by the COP/MOP to certify the emission reductions achieved by the CDM project activities and also undertake independent auditing and verification.
- A share of the proceeds from projects would be used to cover administrative expenses as well as assist vulnerable countries in meeting the costs of adaptation.
- The administrative aspects of the CDM are to be undertaken under the guidance of the COP/MOP and would be supervised by an executive board.
The CDM is compatible with the concept of emissions trading which is a market-based instrument aimed at providing flexibility and choice for achieving the most cost-effective compliance, since CERs could ultimately be traded in such a system. Though being conceptually similar, the CDM shifted away from the concept of freely global or bilateral trading towards a potentially more centralized and controlled form of project-based crediting.
The inclusion of the CDM into the protocol came as a “Kyoto Surprise”. This culminated in a mechanism to further sustainable development goals of developing countries, facilitate technology transfer and cost-effectively address the challenges of global climate change. Whereas there were no concrete proposals or written papers about the CDM prior to Kyoto, it does draw upon and establishes a middle ground compromise between the “Emissions trading/Joint Implementation” proposal, advocated by most Annex-1 countries plus Costa Rica, and the non-compliance penalty/compensation mechanism, forwarded by the developing countries through the “Clean Development Fund” proposed by Brazil.
Its potential utilization at the global level has been advocated, primarily owing to the following:
- The stable and unlocalized nature of carbon dioxide ties in very well with the economic characteristics of a trading market which has been shown to work best for uniformly mixed gases.
- A large disparity of abatement costs across countries (varying, for example, between less than $10/ton of carbon dioxide and $100/ton of carbon dioxide in some cases) provides the economic impetus for trading to take place.
- Application at a global scale enhances participation and potential for global cost savings, while achieving the stated emission targets.
Whereas developing countries objected to global emissions trading because it would require the acceptance of targets for all Parties, the idea of “Joint Implementation (JI)” was supported by some countries, such as Costa Rica. JI represents a bilateral project-based form of emissions trading and would have been a natural progression from the present pilot “Activities Implemented Jointly (AIJ)” phase. Under JI, credits earned from projects in non-Annex I countries through jointly agreed upon greenhouse gas mitigation projects could be used to meet targets of Annex I countries.
The “Clean Development Fund” proposed by Brazil and supported by G-77/China, was based upon the principle of penalizing the non-complying Annex-1 countries and using a percentage of this financial penalty to compensate the non-Annex 1 countries who were mostly vulnerable to the vagaries of global climate change.
It was suggested that, at the end of each budget period, any Annex I Party failing to maintain its emissions within its ceiling should compensate for its failure by paying penalties to a “Clean Development Fund.” This would be done according to a scale which fixes the contribution in direct proportion to the extent of the country’s non-compliance. The resources of the fund were to be made available to non-Annex I Parties for use in climate change mitigation (90%) and adaptation projects (up to 10%).
The proposal also included the option for voluntary contributions from Annex I Parties. Although the principle of penalty/compensation was not taken up, the CDM did draw upon certain innovative elements and ideas of the “Clean Development Fund” including the centralized handling of projects, sustainable development focus and apportionment of a certain percentage of project revenues for adaptation and administrative measures.
Further information
Julia Curtis, International Energy Agency, 9 Rue de la Féderation, 75739 Paris Cedex 15, France. Fax: 33-1-40576739. Email: julia.curtis@iea.org.
Acknowledgements
Comments on this article were provided by Kristi Varangu and Lee Solsbery (International Energy Agency, IEA) and Laurent Dittrick (UNEP). The article does not represent the official views of the IEA or its member countries or UNEP or its member countries. Comments regarding this article are welcome and should be sent to Julia Curtis at the above address.