Implementing the CDM
In a second 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) discuss the opportunities presented by the Clean Development Mechanism and the barriers to be overcome if that potential is to be realized.
Introduced by the Kyoto Protocol, the Clean Development Mechanism follows on from the earlier concepts of Joint Implementation and Activities Implemented Jointly. These concepts enable countries with higher marginal costs of abatement (most developed countries and countries with economies in transition) to reduce emissions in countries with lower marginal abatement costs (developing countries), thereby allowing the most cost-effective “off-setting” of global emissions.
The Activities Implemented Jointly (AIJ) pilot phase was initiated in 1995 as the learning phase and a natural starting point for establishment of a formal Joint Implementation (JI) and then a global carbon trading system.
The major similarities between AIJ and the Clean Development Mechanism (CDM) are the following. Both represent market-based mechanisms for transfer of technology and resources from the developed to the developing countries. The basic criteria, for real and measurable emission reductions, host country approval and establishing of emissions additionality are also similar.
In theory, and as evidenced by the range of projects financed under the programme and the track record so far, it can be stated that AIJ potentially holds immense opportunity and promise for developing countries.
- AIJ offers a linkage mechanism between local development and global environmental issues, thus providing a means of effectively financing sustainable development.
- AIJ allows for foreign investments in priority areas without incurring national debt.
- AIJ opens up the possibility to capitalize on the competitive investment advantage in a large potential market.
- AIJ offers opportunities for fuel substitution, job creation and increasing of foreign investment.
By using AIJ effectively, developing countries can finance environmentally sustainable development, through leveraging and directing focused AIJ capital flows into priority areas. Large-scale afforestation, financing of renewable energy generation and energy efficiency enhancement in industries, fuel switching and so on are some of the potential projects which can, and have been, financed through this instrument. These can lead to local sustainable development as well as climate change mitigation while also providing a vehicle to encourage private sector diffusion of innovative technologies. These benefits have accrued from AIJ projects and could also be benefits of the CDM.
Barriers have, however, been evident during the AIJ pilot phase. Progress on AIJ development has been slow and projects have shown a skewed geographical distribution. Practical experience has been mainly limited to parts of Central America and Eastern Europe. Moreover, although the private sector has undertaken a few active initiatives, overall participation has, so far, not been sufficient to make a substantial impact at a global scale.
For developed countries, lack of financial incentives through accrediting lack of firm emissions targets, lack of incentives to invest in environmentally friendlier but more expensive technologies and high transaction costs have been cited as the barriers and reasons for the slow response. It appears to be a lack of awareness and inadequate institutional capabilities which seem to be the primary factors impeding acceptance and advancement in developing countries.
The importance of information, training, appropriate capacity and focal institutions for AIJ development is evident from the high concentration of AIJ projects in Latin American and Central and Eastern European countries which have this basis. This is no coincidence. These investment flows have been guided by targeted policies, presence of inherent capacities in these regions to take on and manage AIJ projects, and the support of focused institutions and regulation, all of which created a conducive enabling environment.
The development of active AIJ offices/units in countries such as Costa Rica, Poland and the Czech Republic have been instrumental to their successful solicitation of AIJ projects. This has helped them to gain first hand practical experience while moving them up a steep learning curve and attaining understanding and acceptability in preparation for a future trading regime.
In most other developing countries, however, the concept is still shrouded in scepticism and can be seen as an excuse for the industrialized countries to avoid addressing domestic action by “cherry picking” least-cost abatement projects in developing countries.
It is worth adding that complex and varying methodologies of project submission and screening amongst various investor country AIJ programmes was another aggravating factor constraining project development in most developing countries. In the quest for perfection at the outset, the basic premise of AIJ being a “trial and error” stage and a “learning by doing” exercise was sometimes lost.
The framework for the conceptual and administrative working of the CDM, as laid out in the Kyoto Protocol, does seem to carry an inherent potential to address some of the concerns and remove some of the barriers that were faced by the AIJ pilot phase process.
- The CDM can play an intermediary role between the investor and host countries which can, potentially, lead to a reduction in investor risk and project transaction costs.
- If handled in the right spirit, the instrument carries the potential of upholding the priorities and meeting the needs of sustainable development and technology exchange, as established by the developing countries.
- Standardization of complex and varying project methodologies should be a likely outcome of a centralized project handling and certification system.
- Capacity building requirements of developing countries to foster global understanding and consensus building, though not expressly defined, can potentially be addressed under the CDM.
The above characteristics, complemented by the conceptual strength of the emissions trading mechanism for providing the most cost-effective solution to global climate change mitigation and the associated local sustainable development attributes of the CDM, all establish a credible potential for the CDM. However, at the moment, the CDM is only broadly described in the Kyoto Protocol and needs to be effectively designed to address a number of administrative, conceptual and implementation issues in order to realize this promised potential.
Following are some of the issues which confront the development of the CDM and would benefit from further elaboration.
A. Importance of sustainable development: Although the sustainable development focus of the CDM has been emphasized, a number of unanswered questions remain.
How to ensure the sustainable development objectives in a market environment, searching for and driven by least-cost abatement solutions? The focus of CDM has also been stated to include both the private and public sectors. However, for a market-driven initiative in an environment of continuously declining public sector resource flows, should not the focus be private sector oriented? Also, if it is public sector oriented, what measures should be taken to avoid Global Environment Facility replication?
Finally, in terms of the focus, the linkages of the CDM process with the ongoing AIJ pilot phase and the JI/emissions trading between Annex-1 countries needs clarity and elaboration. How will the CDM fit with other new mechanisms?
B. Consensus building and project development mechanisms: The first step in advancing the CDM starts with a process of global consensus building and understanding of the development of the CDM, especially in host developing countries where the CDM projects will be located. Considering the fact that host country capacity has played a major catalytic role in facilitating and directing AIJ pilot phase investments, where present, and has been a major obstacle/barrier, where absent, it should be one of the focal areas for CDM development.
A number of associated queries are present.
What is the nature of the host country capacity? What should be the ideal mechanism for a South-South and North-South-South dissemination of information and climate friendly technologies? Should regular information/experience dissemination forums be facilitated for the South under a focused programme? Should this information dissemination be active (interactive forums, outreach programmes) or passive (internet information) or a mixture of both? How should a mechanism be defined to bring together partners from North and South for technology exchange and project development and to bridge the gap of distrust and scepticism?
C. CDM apportionment and financing: The Protocol refers to the fact that only a “part” of Article-3 emission commitments of Annex-1 countries will be deliverable through the CDM. How is this “part” going to be determined? On what basis?
In terms of financing of the CDM, it has been mentioned that proceeds from the project activities would be used to cover “administrative” expenses as well as “costs of adaptation” for vulnerable countries. How do we decide on these countries and the parcel that each would receive? What percentages to be used for administrative purposes and, out of this, what percentage to be apportioned to “host” country administration?
D. Monitoring, verification and system integrity: For any activity to take place through the CDM, it is absolutely essential to provide integrity and credibility to the system of certification and to ensure that the stated criteria of “real, measurable and additional” reductions are strictly met by the projects delivering the Certified Emission Reductions (CERs). In this respect, the considerable work on project additionality and baseline setting done through the AIJ pilot phase needs to be collated and built upon in an effective and coherent manner to avoid “gold plating” of baselines and overstated emission reduction credits.
A number of issues require debate and resolution. What sort of institutional requirements need to be supported in developing countries for monitoring of project activities? How to tie in these activities with existing programmes? Should monitoring, reporting and verification capacity be built up in the countries locally or should they be left to internationally recognized and independent third parties (environmental auditors)? How to avoid or reduce the associated transaction costs of conducting such an activity in developing countries? What standardized procedures should be adopted?
E. Range of CDM projects: The question remains as to whether or not there are enough good projects out there, and whether or not the private sector is willing to risk financing such projects. Issues of projects in countries particularly vulnerable to impacts of climate change and their high adaptation costs must also be addressed.
To provide clarity and credibility, it is essential that the “rules of the road” for the CDM be defined to offer it a chance of optimizing and catalyzing resource capital at a global scale. All this has to be undertaken in the larger context of maintaining the sustainable development focus for developing countries and facilitating an environment of mutual trust and understanding between North and South.
F. Institutional and administrative arrangements: As defined in the Protocol, the CDM would be administered through three stated bodies, the executive board, the Conference of the Parties (COP) and the Meeting of the Parties (MOP) and the operational entities which would also be supported by independent auditing and verification bodies. With the COP/MOP designated for “authority and guidance” of the CDM, the executive board for “supervision” and the operational entities for “certification” of emission reductions, the exact role of all of them and the linkages between them remain unclear and ambiguous. When considering this issue, it is important to keep in mind that CDM is inherently a market-based concept which, theoretically, provides effectiveness in an enabling environment created through efficiency, flexibility and choice, avoiding an overly restrictive approach and bureaucratic procedures.
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.