Clean Development Mechanism
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The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol allowing industrialised countries with a greenhouse gas reduction commitment (called Annex B countries) to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries. A crucial feature of an approved CDM carbon project is that it has established that the planned reductions would not occur without the additional incentive provided by emission reductions credits, a concept known as "additionality".
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. However, in recent years, criticism against the mechanism has increased.
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).
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[edit] History and Purpose
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 (see Environmental Concerns below). Eventually, and largely on US insistence, 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 B 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.
To prevent industrialised countries from making unlimited use of CDM, the framework has a provision that use of CDM be ‘supplemental’ to domestic actions to reduce emissions. This wording has led to a wide range of interpretations - the Netherlands for example aims to achieve half of its required emission reductions (from a BAU baseline) by CDM . It treats Dutch companies' purchases of European Emissions Trading Scheme allowances from companies in other countries as part of its domestic actions.
The CDM gained momentum in 2005 after the entry into force of the Kyoto Protocol. Before the Protocol entered into force, investors considered this a key risk factor. The initial years of operation yielded fewer CDM credits than supporters had hoped for, as Parties did not provide sufficient funding to the EB. This left it understaffed.
The Adaptation Fund was established to finance concrete adaptation projects and programmes in developing countries that are Parties to the Kyoto Protocol. The Fund is to be financed with a share of proceeds from clean development mechanism (CDM) project activities and receive funds from other sources.
[edit] CDM project process
[edit] Outline of the project process
An industrialised country that wishes to get credits from a CDM project must obtain the consent of the developing country hosting the project that the project 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.
[edit] Establishing additionality
To avoid giving credits to projects that would have happened anyway ("freeriders"), 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:
- What is often labelled ‘environmental additionality’ has that a project is additional if the emissions from the project are lower than the baseline. It generally looks at what would have happened without the project.
- In the other interpretation, sometimes termed ‘project additionality’, the project must not have happened without the CDM.
A number of terms for different kinds of additionality have been discussed, leading to some confusion, particularly over the terms 'financial additionality' and 'investment additionality' which are sometimes used as synonyms. 'Investment additionality', however, was a concept discussed and ultimately rejected during negotiation of the Marrakech Accords. Investment additionality carried the idea that any project that surpasses a certain risk-adjusted profitability threshold would automatically be deemed non-additional VROM (Netherlands Ministry of Housing, Spatial Planning and the Environment). 'Financial additionality' is often defined as an economically non-viable project becoming viable as a direct result of CDM revenues.
At present, the CDM Executive Board deems a project additional if its proponents can document that realistic alternative scenarios to the proposed project would be more economically attractive or that the project faces barriers that CDM helps it overcome.
Many investors argue that the environmental additionality interpretation would make the CDM simpler. Environmental NGOs have argued that this interpretation would open the CDM to free-riders, permitting developing countries to emit more CO while failing to produce emission reductions in the CDM host countries.
It is never possible to establish with certainty what would have happened without the CDM or in absence of a particular project, which is one common objection to the CDM. Nevertheless, official guidelines have been designed to facilitate uniform assessment[1], set by the CDM Executive Board for assessing additionality.
[edit] Establishing a baseline
The amount of emission reduction, obviously, depends on the emissions that would have occurred without the project minus the emissions of 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 avoid this potential problem.
[edit] Methodologies
Any proposed CDM project has to use an approved baseline and monitoring methodology to be validated, approved and registered. Baseline Methodology will set steps to determine the baseline within certain applicability conditions whilst monitoring methodology will set specific steps to determine monitoring parameters, quality assurance, equipment to be used, in order to obtain datas to calculate the emission reductions. Those approved methodologies are all coded. "AM" stands for "Approved Methodology," "ACM" stands for "Approved Consolidaded Methodology," "AMS" stands for "Approved Methodology for Small Scale Projects" and so on. All the approved methodology are listed in the UNFCCC home page. If a project developer can not find an approved methodology that fits in his/her particular case, the project developer may submit a new methodology to the Meth Panel, and if approved the new methodology will be converted to a Approved Methodology.
[edit] Financial issues
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.
The IPCC has projected GDP losses for OECD Europe with full use of CDM and Joint Implementation to between 0.13 and 0.81 % of GDP versus 0.31 to 1.50 Climate Change 2001 - Synthesis report. Figure SPM-8] IPCC, 2001 with only domestic action.
While there would always be some cheap domestic emission reductions available in Europe, the cost of switching from coal to gas could be in the order of €40-50 per tonne CO equivalent. CERs from CDM projects were in 2006 traded on a forward basis for between €5 and € 20 per tonne CO equivalent. The price depends on the distribution of risk between seller and buyer. The seller could get a very good price if it agrees to bear the risk that the project's baseline and monitoring methodology is rejected; that the host country rejects the project; that the CDM Executive Board rejects the project; that the project for some reason produces fewer credits than planned; or that the buyer doesn't get CERs at the agreed time if the international transaction log (the technical infrastructure ensuring international transfer of carbon credits) is not in place by then. The seller can usually only take these risks if the counterparty is deemed very reliable, as rated by international rating agencies.
[edit] Concerns
[edit] Exclusion of forest conservation/avoided deforestation from the CDM
The first commitment period of the Kyoto Protocol excluded forest conservation/avoided deforestation from the CDM for a variety of political, practical and ethical reasons. A New Initiative to Use Carbon Trading for Tropical Forest Conservation] William F. Laurance(2007), Biotropica 39 (1), 20–24 . However, carbon emissions from deforestation represent 18-25% of all emissions [2], and will account for more carbon emissions in the next five years than all emissions from all aircraft since the Wright Brothers until at least 2025 . Forests First in the Fight Against Climate Change] Global Canopy Programme, 2007</ref>. This means that there have been growing calls for the inclusion of forests in CDM schemes for the second commitment period from a variety of sectors, under the leadership of the Coalition for Rainforest Nations, and brought together under the Forests Now Declaration, which has been signed by over 300 NGOs, business leaders, and policy makers. There is so far no international agreement about whether projects avoiding deforestation or conserving forests should be initiated through separate policies and measures or stimulated through the carbon market. One major concern is the enormous monitoring effort needed in order to make sure projects are indeed leading to increased carbon storage. There is also local opposition. For example, May 2nd 2008, at the United Nations Permanent Forum on Indigenous Issues (UNPFII), Indigenous leaders from around the world protested against the Clean Energy Mechanisms, especially against Reduced Emissions from deforestation and degradation.
[edit] Lack of special concern for afforestation projects
Combating global warming has broadly two components:Decreasing the release of green house gases and Sequestering the green house gases, of which CO2 is the component, from atmosphere. Battle has to be fought on both the fronts but it is found that emphasis is only on the former. There is not sufficient emphasis on the later. It must be understood that even with best efforts we can only reduce the emission of greenhouse gas but we cannot eliminate it altogether. So the amount of green house gases in the atmosphere will only increase with time. Hence we need to concentrate on sequestering the green house gases also. When it comes sequestering CO2 there is nothing on the planet, it is repeated nothing, except a growing tree that can do it. The fact that one and only way to sequestrate CO2 is through trees, is a very important fact that must be understood if we want to fight global warming in a realistic way.It is a well known fact that a plant purifies environment but we need to understand how after all a plant does purifies environment. And is there any way to quantify the amount of purification done by various plants? There is nothing magical or unknown about the process. The process which purifies the environment is a well known process ie photosynthesis and there is an unambiguous way to measure the amount of purification done by a plant. Photosynthesis is natural processes that uses CO2, releases O2 and produces various forms of sugar ie C6H12O6.The amount of carbon sequestered by a plant can actually be measured without any ambiguity as explained below. The byproduct of the photosynthesis is cellulose or C6H12O6 or wood. Hence the physical manifestation of the photosynthesis is the increase in volume and weight of the plant. It is possible ie the rate of sequestration of CO2 may differ from plant to plant ,which is also evident from that fact that different tree/plants grow at different rates , but the sum total of the CO2 sequestered has to be proportional to dry biomass ie the biomass from which the water has been removed. In fact empirically it can be said that for every 180 tons of dry wood produced, 264 tons of CO2 is consumed and 192 tons of O2 is given out. Not so evident but another important contribution of a growing tree is that apart from conversion of CO2 to O2 a growing plant also absorbs heat. This is nothing but the sunlight that would have otherwise converted into heat had it not been used for photosynthesis. This is why we feel cooler under a tree. So a tree also helps the global warming by storing heat. Above stated facts can be understood by the reverse logic like as follows. Suppose we cut a tree and burn it. We get mainly two things: CO2 and heat. By simple logic of conservation of energy and chemical constituents it can be safely assumed that this was the amount of heat and CO2 absorbed by the plant while growing. Now the issue comes that if photosynthesis is the key to carbon sequestration then why emphasis on tree only as every plant does photosynthesis. Here it is important to understand that though there are various form of C6H12O6 like sugar, cellulose, carbohydrate, oil (as happens in say pine trees) etc but timber is the only way CO2 remains blocked for a longer period of 5-100 years. In all other forms either it is burnt, consumed or decomposed within a year or so releasing the entire CO2. Hence though all the plants excluding CO2 can sequester CO2 but the form in which it does, the same cannot be stored for long period of more than maximum 5 years and on average 1 year. Inferences that can be drawn from above analysis is as follows: There is nothing on the planet other than a growing tree that can reduce CO2. Meaning thereby that tree has to central to any program of combating global warming. For long term it is much more beneficial to promote use of timer rather than substituting as it is the only meaningful way to store CO2.If an item which is substituting wood consumes less energy during its production than what is produced by burning the equivalent amount of wood, then only it is beneficial to environment else it is more harmful, at least from environmental point. There is a need to promote plywood industry in big way which helps in using even the inferior quality of wood to be used as timber which otherwise would have been used as fuel-wood.A fully grown tree which is not growing in volume may be good for wild life but is doing no good to the environment as the sum total of CO2 taken in and given out almost balances each other. Hence felling of mature tree, using it as timber (not fuel-wood) and planting new trees is the best solution to global warming. But unfortunately this point is not being given its due importance in the CDM mechanism.
[edit] The risk of false credits
As the CDM is an alternative to domestic emission reductions, the perfectly working CDM would produce no more and no less greenhouse gas emission reductions than without use of the CDM. However, it was recognized from the beginning that if projects that would have happened anyway are registered as CDM projects, then the net effect is an increase of global emissions as those "spurious" credits will be used to allow higher domestic emissions without reducing emissions in the developing country hosting the CDM project. Spurious credits may also occur because of overstated baselines. Such a inclusion is termed a "false positive".
On the other hand, if a project is rejected because the criteria are set too high, there will be missed opportunities for emission reductions. Such a rejection is termed a "false negative". For example, if it costs $75 to remove just one tonne from a domestic power station in a developed country, while the same money would reduce 37.5 tonnes of emissions through a genuinely additional CDM project in China, it is important that the validation process does not become so bureaucratic or onerous as to dissuade the more effective option. Some observers report that the CDM process is producing far more of these false negatives than false positives.
By February 2009, there were 1202 projects with capacity of 41,881 MW (66% from China) had applied for credits. If issued, these hyrdoelectric instutitions would essentially be stealing from Northern taxpayers and consumers. [3]
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.
Significant volumes of CERs come from CDM projects at refrigerant-producing factories in non-Annex-1 countries (particularly China) that generate the powerful greenhouse gas HFC 23 as a by-product. By destroying the HFCs, the factories can earn carbon credits. Destroying the HFCs requires a simple and relatively cheap piece of equipment called a scrubber. The cost per CER can be lower than 1€. Critics say 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 [14][15][16]. Proponents respond that HFC 23 emissions were not abated in developing countries until CDM was introduced, and that in a well-functioning market rent is shared between buyer and seller, not held exclusively by one of the parties to a transaction. Critics have also highlighted that HFC 23 emitters can earn more from CDM credits than from selling refrigerant gases and that this a major distortion of the market. Proponents would agree that this was to some extent correct in the initial phase, but point to the fact that the regulation has been updated to make sure no carbon credits can be earned from expanding refrigerant production beyond what was already in place in 2002 [16]. Negotiators are currently discussing how to reduce as much Hydrofluorocarbon (HFC) emissions as possible under the CDM without creating a perverse incentive to build more HCFC-22 production facilities just to get the revenues from selling CDM credits. If this were to happen, developing countries' obligations to stabilise (2013) and phase out (2030) Hydrochlorofluorocarbons (HCFCs) would be in jeopardy.
Negotiators have not yet been able to agree on whether, or how, carbon capture and storage projects should be allowed under the CDM.
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 CDM Project 0177 Lawley Fuel Switch Project] UNFCCC . 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 Carbon trade watch].
[edit] CDM projects to date
File:CDM CERs distribution by project type.Distribution of CDM emission reductions, by project type.
As of 1 March 2009, 1431 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.
[edit] Transportation
The BRT system in Bogota, TransMilenio, is the only public transport system registered for CDM with the UN Framework Convention on Climate Change.
[edit] 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.
[edit] Notes
- ^ Tool for the demonstration and assessment of additionality (Version 03), UNFCCC CDM EB, EB 29
- ^ Stern, N. 2006. Stern Review of the Economics of Climate Change
- ^ http://www.internationalrivers.org/en/global-warming/the-cdm-kyotos-carbon-offsetting-scheme
