Clean Development Mechanism (CDM)

Overview

The Kyoto Protocol provides that industrial nations can redeem a part of their climate protection commitments by implementing projects aimed at reducing emissions in other countries. For the most part these projects will be carried out by private sector companies. These private companies can hence benefit economically from generating additional emission reductions as compared to a business as usual case.

The Flexible Mechanisms of the Kyoto Protocol

There are two instruments in the Kyoto Protocol which permit the acquisition of emission credits by means of project-based investments abroad:

1. Joint Implementation (JI), in which industrialised countries and economies in transition (listed in Annex I of the UNFCCC/Annex B of the Kyoto Protocol) carry out climate protection projects together, and
   
2. the Clean Development Mechanism (CDM), for climate protection projects in developing countries (not listed in Annex B of the Kyoto Protocol).
   

The underlying principle is the same for both JI and CDM:

An investor implements a project in a host country which reduces emissions and receives emission credits in return. The project might, for example, involve retrofitting state-of-the-art technology to improve the efficiency of a coal-fired power station or building new plant which draws on renewable forms of energy.

Emission credits are issued on condition that these emission reductions are achieved in addition to those achieved by other actions which would have taken place anyway without the project. This ecological "additionality" is verified against the emission reductions in a reference scenario or baseline. This baseline will show what volume of emissions would have been achieved without the project.

The prime difference between JI and CDM - derives from the nature of the host country. A distinction is drawn between industrialised countries and economies in transition on the one hand (Annex I UNFCCC/Annex B Kyoto Protocol) and emerging economies and developing countries on the other (Non-Annex I UNFCCC/Non-Annex B). These countries are accorded different treatment under the Kyoto Protocol, resulting in a few differences in the modalities and requirements of the projects concerned.

Objectives of the CDM are to support non-industrialized countries in a sustainable development, and to reach global emission reductions more easily. The CDM is open both to public and private institutions.

Rules regarding the CDM are somewhat stricter than in the case of JI: Projects have to comply with sustainability criteria of the host country, and they shall not use ODA money (financial additionality). However, discussions on how to precisely define this additionality criterion are still under way.

According to the Kyoto Protocol, CDM projects that are implemented in or after 2000 can already be accounted for the first commitment period 2008-2012. But, detailed rules for this early accreditation have not been defined so far.

As there is not yet a market for certificates like the CER or the ERU from JI projects, prices of certificates are subject to speculation and gambling. Simulation studies suggest that prices initially may be at a level of between US$ 3 and 15. These prices are usually not guaranteed. An exemption is the Netherlands, where within a pilot programme, the so-called CERUPT programme, project developers can apply for refinancing of the CER created with their project, and will get a guaranteed price.

Regarding eligibility of projects for the CDM, the Marrakech Accords contain concrete statements on nuclear energy activities and criteria for the use of CO2 sinks (COP 6 Resolutions). Nuclear energy projects do not qualify for JI or CDM. Furthermore, CDM sink projects must conform to a narrow framework: Sink projects in the CDM procedure are restricted to afforestation and reforestation activities.

In the first commitment period, emission credits from CDM afforestation/reforestation projects shall not exceed 1 % of the base year emissions of an Annex I country. Any sink activities qualifying for the first Commitment Period will be subject to criteria which have not as yet been formulated. A UN resolution is scheduled for COP 9. Until that time notified sink projects will be pre-registered and their validation will apply after COP 9. Pre-registration does not mean that any of the terms of validation are automatically recognised in advance. Moreover, to comply with the 1 % rule quantitative monitoring of declared RMUs (removal units) must be established for the first Commitment Period. There is still no recognised procedure for validating sink projects within the JI framework.

To conclude, the key characteristics of JI and CDM are summarised below.

Table 1: The specific and distinctive features of JI and CDM

Activities and Responsibilities

Consultations about procedures and rules which will apply to any CDM project and to small-scale CDM are still ongoing. Institutions responsible for the concrete execution of CDM procedures are therefore not yet completely existing.

On the international level, the CDM Executive Board is discussing these issues at its meetings, while first experience regarding CDM is being made. After its 5th meeting held on 1-2 August 2002 in Bonn, the executive board made publicly available for comments a couple of suggestions for rules for small-scale CDM ("Draft simplified modalities and procedures for small-scale CDM project activities"). At its eighth session in New Delhi (November 2002), the Conference of the Parties adopted these simplified modalities and procedures for CDM small-scale project activities. On 29 August 2002, the Executive Board announced the release of the CDM project design document (CDM-PDD). Project participants shall submit for validation information on their proposed project activity using the CDM-PDD.

Regarding application and accreditation of Designated National Authorities (DNA) and Designated Operational Entities, procedures are well-defined and can be downloaded from the Internet. A small number of countries already designated a national authority responsible for the CDM. As for Designated Operational Entities, applications are still under way.

On the level of the European Union, CDM is currently being discussed to be introduced into the Emissions Trading Scheme that is supposed to enter into force in 2005. More precisely, the European Climate Change Programme (ECCP) is currently looking at putting the rules for JI and CDM into operation.

The ECCP was launched in June 2000; its goal is to identify and develop all the necessary elements of an EU strategy to implement the Protocol. Taking a 'twin-track' approach, the ECCP is preparing a range of additional EU-level policies and measures to cut greenhouse gas emissions as well as an emissions trading scheme that could start operating within the EU by 2005. It is being conducted through a cooperative effort involving all relevant stakeholders, including representatives from the Commission's different departments, the Member States, industry and environmental groups.

-> For more information on most recent decisions see European Commission or European Climate Change Programme

Germany has not yet decided on the institutional structures for the CDM. On the federal level, the German Federal Environmental Ministry is responsible for the flexible mechanisms but to date only a coordination office for JI has been created. However, this office can be expected to be responsible for CDM as well. In February 2003, a "Handbook for Project Developers for JI and CDM Projects" was published and can be downloaded with detailed instructions from the Ministry's homepage. It shall help investors to plan their projects and deliver all information in accordance with the internationally agreed rules. For further information please contact the Joint Implementation Coordination Office under Thomas.Forth@bmu.bund.de.

Regarding the eligibility of projects, to date, Germany has only a few rules, and there are no restrictions on project activities which go beyond those of the Marrakech Accords. Clear note should be taken, however, that it is difficult to devise criteria for sink projects and that procedures for crediting CDM afforestation/reforestation projects are still being negotiated at international level. These negotiations will probably last until October 2003 or even longer. Hence, in the case of sink projects, no assumption should yet be made that credits will automatically be recognised in the future. As many other governments, the German government also discusses plans for funds to foster CDM activities, in particular the fields of renewable energies and energy efficiency.

What Can CDM Contribute to Financing Renewable Energy (RE) or Energy Efficient (EE) Projects?

To show what CDM can contribute to financing renewables energy (RE) or energy efficiency (EE) projects, the potential revenues of CERs of the suggested projects in Cuba were calculated. Within this calculation, the part of the revenues (2%) which is used to finance the administration costs of the instrument as well as measures to adapt to climate change, was not taken into account.

For the two suggested projects (substitution of old inefficient refrigerators in Cuba and the construction of wind power plants by private investment, see relevant papers) the general requirements for CDM are fulfilled:

• The projects effect a measurable long-term change in climate gas emissions
• Emission reduction would not have been realized without the project
• Consistency, transparency and reliability of the forecast emission reductions
• To calculate the emission reduction, first the basic question has to be answered: How would emissions develop without the measure? To answer this question we proceed in three steps:
• System boundaries need to be defined
• Assumptions on future developments need to be made
• Baseline-emissions need to be calculated

System Boundaries

The systems boundaries can be drawn in different ways. In the figure below, the system boundaries are shown: The amount of electricity which is being saved through the substitution of inefficient through highly efficient refrigerators does not need to be produced by power plants. The saved emissions of the power plant (including the savings of avoided net-losses) are then calculated on the basis of the efficiency of an average power plant.

Definition of the system boundaries

Assumption on Future Developments and Baseline Emissions

In the future, the efficiency of the power plants may raise, the grid losses may decrease through a reinforcement of the grid. These developments have to be taken into account.

The following assumptions were made:

Table 2: Assumptions on the development of the power system

This assumed development has to be proven by the later real development and the calculation has then to be redone.

As shown in table 2, the emission reduction per kWh electricity produced by a wind power plant will be about 0,99 kg of CO2 in the year 2003.

The contribution of the CERs to the financing of projects or technologies depends on different factors:

First, on the development of the value of CERs, which is not predictable and dependent on the climate policy of the Annex I countries.

Secondly, on the cost of the used technology in relation to the emission reduction.

Table 3: Assessment of the effects of CDM on financing projects

The effects of CDM on financing projects is shown in the table above. For cost-effective measures (e.g., wind energy, efficiency measures) CDM can render a major contribution to financing, depending on the value of the CERs. For expensive technologies (referring to emission reduction) like solar energy CDM hardly renders a contribution to financing.

Conclusion

CDM can contribute to the realisation and financing of projects. However, it does not solve existing substantial financing problems. Nevertheless, CDM is an interesting instrument to release an incentive for new projects and new activities in energy efficiency and renewable energy.

Status of CDM projects

In total 8464 CDM projects are now included in the list of projects that handed in proposals. (excluding the 276 projects given a negative validation by DOEs, the 2238 projects where DOEs terminated the validation, the 275 rejected by EB and the 64 withdrawn).

• 7770 of the projects are now registered and a further 4 are in the registration process. 3049 CDM projects have got CERs issued.

Further Information

• Clean Cooking in the Markets of Maputo
  
• Clean Development Mechanism (CDM) and Baseline-Assessments for Wind Energy Projects
  
• Cleaner Integral Utilisation of Sisal Waste for Biogas and Biofertilizers
  
• Clean Development Mechanism (CDM) and Wind Energy Projects in Brazil