Clean Development Mechanism CDM DP Final
-
Upload
jason-riu-gordon -
Category
Documents
-
view
219 -
download
0
Transcript of Clean Development Mechanism CDM DP Final
-
7/31/2019 Clean Development Mechanism CDM DP Final
1/84
1
2010
Jason Gordon
Evans School of Public Affairs
PB AF 608 C
6/2/2010
The CDM and Sustainable Development
-
7/31/2019 Clean Development Mechanism CDM DP Final
2/84
2
Table of ContentsExecutive Summary ....................................................................................................................................... 4
1. Introduction .............................................................................................................................................. 5
1.1 Climate Change Basics ........................................................................................................................ 6
1.2 The UNFCCC and the Kyoto Protocol .................................................................................................. 7
1.3 The Kyoto Mechanisms ....................................................................................................................... 8
2. CDM History and Overview ..................................................................................................................... 10
2.1 Clean Development Mechanism Project Cycle ................................................................................. 12
2.2 Example of a Hypothetical CDM Project ........................................................................................... 13
2.3 Description of Actual CDM Projects .................................................................................................. 14
3. The CDM and Sustainable Development (SD) ......................................................................................... 15
3.1 Tension within the CDM.................................................................................................................... 163.2 How CDM projects may contribute to SD ......................................................................................... 18
3.3 Differing Perspectives on Sustainable Development and the CDM ................................................. 20
3.4 Host country requirements to ensure sustainable development benefits from CDM projects ....... 23
3.5 Applying Sustainable Development Criteria to CDM Projects .......................................................... 24
4. Geographic Distribution of CDM Projects ............................................................................................... 26
5. CDM Change over Time .......................................................................................................................... 28
6. Institutional Analysis of the CDM............................................................................................................ 30
6.1 CDM and Transaction Costs .............................................................................................................. 30
6.2 Stakeholder Analysis ......................................................................................................................... 31
6.3 CDM Additionality and Sustainable Development ........................................................................... 33
6.4 One Instrument for Multiple Goals ................................................................................................... 33
7. Problem Statement and Research Question ........................................................................................... 34
7.1 Current Reforms ................................................................................................................................ 34
7.2 Possible Policy Alternatives .............................................................................................................. 36
8. Summary of Background and Policy Alternatives ................................................................................... 41
9. Methodology ........................................................................................................................................... 42
9.1 Policy Evaluation ............................................................................................................................... 42
9.2 Sustainable Development Measurement ......................................................................................... 43
9.3 Program Theory of Change Analysis ................................................................................................. 44
-
7/31/2019 Clean Development Mechanism CDM DP Final
3/84
3
9.4 Measuring Sustainability: Content Analysis of Sustainable Development Contribution of CDM
Projects ................................................................................................................................................... 52
9.5 Taxonomy for Assessment of Sustainable Development Benefits of CDM Projects ........................ 57
9.6 Narrowed Analytical Focus: .............................................................................................................. 60
9.7 Example Project Coding .................................................................................................................... 61
10. Results of PDD Content Analysis ........................................................................................................... 64
11. Analysis of Reform Alternatives ............................................................................................................ 64
12. Discussion .............................................................................................................................................. 68
12.1 Alternative 1: SD-CER Premium ..................................................................................................... 68
12.2 Alternative 2: SD Certification - Sustainability Labeling.................................................................. 69
12.3 Alternative 3: Establish a Clean Development Fund ....................................................................... 70
13. Decision Matrix ..................................................................................................................................... 72
14. Policy Recommendations ...................................................................................................................... 73
15. Conclusion ............................................................................................................................................. 74
16. Appendix ............................................................................................................................................... 75
Figure 1. CDM Outline ............................................................................................................................. 75
Figure 2. Current CDM Pipeline of Projects Figure 3. Project Category Breakdown ............... 76
Table 1. Percentage of total issued CERs by Project Type ...................................................................... 76
Figure 4. CERs issued by Project Type ..................................................................................................... 77
Table 2. Millennium Development Goals relevance to CDM projects .................................................... 77
Copenhagen (COP 15) and the CDM ....................................................................................................... 79
Common Abbreviations and Acronyms .................................................................................................. 81
Works Cited ................................................................................................................................................. 81
With Appreciation for Assistance and Advisement to:
Zbigniew Bochniarz Evans School of Public Affairs
Joe Cook Evans School of Public Affairs
Carrie Lee Stockholm Environment Institute
Michael Lazarus - Stockholm Environment Institute
-
7/31/2019 Clean Development Mechanism CDM DP Final
4/84
4
Executive Summary
The Clean Development Mechanism of the Kyoto Protocol seeks to aid developed
countries in efficiently meeting their GHG emissions reductions goals while contributing to
sustainable development in developing countries. CDM project developers are rewarded with
tradable credits upon project completion after the GHG reductions of the project are verified by
an outside auditor. Current literature suggests that the market structure of the CDM leads
project developers and host countries to focus on the GHG emissions reduction objective while
paying little attention to sustainable development or the equitable distribution of projects in
the developing world. This study attempted to build on efforts to measure CDM sustainable
development impacts and gauge which of four CDM reform options would best correct the
imbalance between the CDMs dual objectives. Several methods including program theory and
content analysis were used to make a broad multi-criteria assessment of the reform options.
The results show that a reformed CDM which used the market to price sustainable
development increased sustainable development impacts and greatly increased the geographic
diversity of projects.
-
7/31/2019 Clean Development Mechanism CDM DP Final
5/84
5
1. Introduction
The Clean Development Mechanism (CDM) is one of three instruments of the Kyoto
Protocol, an internationally binding agreement to reduce the emissions of greenhouse gases.
The CDMs dual mandate is to mitigate climate change and contribute to sustainable
development. In Article 12 of the Kyoto Protocol where the CDM is outlined, sustainable
development benefits are put on equal footing with emissions reductions. This wording was the
result of a compromise during the Protocol negotiations where developing nations saw an
opportunity to garner substantial investments and new technology to foster sustainable growth
while at the same time industrialized nations were offered a cost-effective alternative to
domestic emissions reductions. Since its inception in 2005, the general consensus is that the
CDM has worked successfully at promoting emissions reductions through a carbon offset
market but has failed at effectively promoting sustainable development in developing countries
hosting projects.
The perceived tension between the two goals of the CDM market efficiency in
lowering emissions and sustainable development (nonmarket improvements in human welfare
-
7/31/2019 Clean Development Mechanism CDM DP Final
6/84
6
and the local environment) have raised questions about the potential for climate policy to
promote sustainable development (Nathan E. Hultman, 2009, p. 121).
This review of the literature seeks to understand the tension within the CDM, and
attempts to address it so sustainable development is given the same weight in practice as it is
within the rhetoric of the Kyoto Protocol. Can the CDM be win-win or should it as some
suggest, focus exclusively on utilizing market efficiencies to bring about as many emission
reductions as possible? Can sustainable development be incorporated into the CDMs core
incentive structure?
1.1 Climate Change Basics
Since the beginning of the industrial age, the burning of fossil fuels (primarily coal and
oil) and deforestation have caused the concentrations of heat-trapping greenhouse gases (CO2,
HFC, NO2, CH4, O3) to increase significantly in the atmosphere. Similar to the glass panels of a
greenhouse, these gases prevent heat from escaping to space.
Greenhouse gases are necessary - without them, the temperature of the Earth would be
too cold to sustain life as we know it. However, as these gases continue to accumulate in the
atmosphere, the Earth's temperature is climbing above historic levels. According to NOAA and
NASA data, the Earth's average surface temperature has increased by about 1.2 to 1.4F in the
last century. Further confirmation that the Earth is warming is that the eight warmest years on
record (since 1850) have all occurred since 1998, with the warmest year being 2005 (U.S. EPA).
In 2007 the Intergovernmental Panel on Climate Change (IPCC) concluded that it is
more than 90% likely that humanitys greenhouse gas emissions are responsible for climate
-
7/31/2019 Clean Development Mechanism CDM DP Final
7/84
7
change. In order to avoid what many climate change scientists predict to be the point at which
the climate system becomes unstable, the IPCC predicts it will cost $1.375 trillion (2.5% of
global GDP) per year to mitigate climate change and keep global temperature increases to less
than two degrees Celsius1
(IPCC AR4). If the world fails to stabilize emissions to limit the
temperature increase, scenarios abound of catastrophic sea-level rise, increased droughts and
flooding, pestilence, famine, war, and death. Though the efforts to coordinate climate change
mitigation have been ongoing, the nations of the world have yet to achieve an effective model
to reach the agreed-upon goal: sustainable development that reduces climate change risk
(making abrupt and/or catastrophic climate change less likely). Partially, this is due to the
extraordinary complexity of the problem that involves multiple actors with varying preferences,
a long time-scale, critical uncertainties, and a weak international system.
1.2 The UNFCCC and the Kyoto Protocol
The United Nations Framework Convention on Climate Change (UNFCCC) is an
international environmental treaty agreed upon at the Earth Summit (Conference on
Environment and Development) held in Rio de Janeiro in June of 1992. Legally non-binding, the
192 parties to the UNFCCC meet annually at the Conference of Parties (COP) to assess progress
in efforts to address climate change. The most enduring update of the UNFCCC has been the
Kyoto Protocol, a legally binding agreement that sets mandatory emission limits for a number
of industrialized countries. A core principle in the Protocol is for all parties to protect the
climate system for the benefit of present and future generations of humankind, on the basis of
equity and in accordance with their common but differentiated responsibilities and respective
1The upper limit of warming after which climate scientists predict dangerous consequences (changing weather
patterns, rising sea levels, increased disease vectors, etc.)
-
7/31/2019 Clean Development Mechanism CDM DP Final
8/84
8
capabilities (KYOTO PROTOCOL, n.d.). The Kyoto Protocol was initially adopted in 1997. It
went into effect in 2005 and will enter into its next phase in 2012. 187 nations have signed and
ratified the protocol that has the goal of achieving
stabilization of greenhouse gas concentrations in the atmosphere at a level that would
prevent dangerous anthropogenic interference in the climate system Such a level should
be achieved within a time-frame sufficient to allow ecosystems to adapt naturally to
climate change, to ensure food production is not threatened and to enable economic
development to proceed in a sustainable manner (UNFCCC Art. 2).
Through national measures as well as market-based flexible mechanisms, the Kyoto
Protocol is an effort to establish a legally binding international agreement where all signatory
nations commit themselves to reducing greenhouse gas emissions. The original target set was a
reduction of 5.2% GHG concentrations from 1990 levels by 2012. The Protocol additionally
includes an adaptation fund to finance efforts to minimize impacts of climate change on
developing countries. The flexible market mechanisms by which countries could seek efficiently
meet their targets include emissions trading, the clean development mechanism, and joint
implementation.
1.3 The Kyoto Mechanisms
The main issues grappled with in the Kyoto Protocol negotiations revolved around two
questions: how much climate change risk is reasonable and how to share the burden of
emission reduction equitably? The following mechanisms were seen as ways to address both of
these questions in the most efficient way possible.
-
7/31/2019 Clean Development Mechanism CDM DP Final
9/84
9
1) Joint Implementation: (between Annex I2 countries only): Any Annex I country can invest in
emission reduction projects in any other Annex I country as an alternative to reducing
emissions domestically.
2) Emissions Trading: (between Annex I countries only): ET is an administrative approach used
to control pollution by providing economic incentives for achieving reductions in the emissions
of pollutants. A central authority such as a government sets a limit or cap on the amount of a
pollutant that can be emitted. Companies or other groups are issued emissions permits
(through an auction or other mechanism) and are required to hold an equivalent number of
allowances (credits) which represent the right to emit a certain amount. The total of allowances
and credits cannot exceed the set cap, thus limiting total emissions to that level. Companies
that need to increase their emission allowance must buy credits from those who pollute less.
The transfer of allowances is referred to as a trade. In theory, this system, also called cap and
trade, puts a price on the pollutant and creates a market for efficient reduction of emissions.3
3) Clean Development Mechanism: The CDM promotes co-operative measures between the
industrialized (Annex-I) and the developing (non-Annex-I) countries. The CDM allows Annex-I
countries to implement projects that reduce greenhouse gas emissions in non-Annex-I party
nations. This reduction produces Certified Emission Reduction credits (CERs), each equivalent to
one ton of CO24. CERs can be traded and sold on most carbon exchanges, giving Annex-I
2Annex I refers to all developed countries and economies in transition that are party to the UNFCCC. By default, all
other countries are referred to as non-Annex I. Only Annex I countries are currently committed to targeted
reductions of GHG emissions.3
Other examples of Emission Trading schemes include the U.S. Clean Air Act and the Montreal Protocol.4
Since CO2 is not the only greenhouse gas, CERs are also referred to as being equivalent to one ton of CO2e or
CO2 equivalent.
-
7/31/2019 Clean Development Mechanism CDM DP Final
10/84
10
countries the possibility of achieving their commitments more cost-effectively, and through the
investment and development benefits of projects, helping non-Annex I countries achieve
sustainable development (Tucker, 2009, p. 2). For a graphical representation of how the CDM
functions, see Appendix, Figure 1.
By treating greenhouse gas emissions as commodities, the flexible mechanisms of the
Kyoto Protocol aim to help price greenhouse gases and use markets to internalize the negative
externalities of emitting sectors of the economy. Like JI, the CDM functions as a baseline-and-
credit system, through which credits can be earned by reducing greenhouse gas emissions
against a constructed baseline. The mechanisms themselves do not reduce GHG emissions but
rather through the global carbon marketplace they create, make emissions reductions more
efficient (van Asselt & Gupta, 2009). In other words, the origin of GHG emissions is not
important from an environmental standpoint. Of vital importance is that global GHG
atmospheric concentrations are reduced at least cost to the global economy.
2. CDM History and Overview
Article 12 of the Kyoto Protocol to the United Nations Framework Convention on
Climate Change defines the purpose of the CDM as being:
to assist Parties not included in Annex I in achieving sustainable development and in
contributing to the ultimate objective of the Convention and to assist Parties included in Annex-
I in achieving compliance with their quantified emission limitation and reduction commitments
under Article 3(KYOTO PROTOCOL, n.d.).
-
7/31/2019 Clean Development Mechanism CDM DP Final
11/84
11
Article 12 of the Kyoto Protocol was a product of heated controversy and negotiations.
Because of the last-second nature of the proposal and its relative importance at Kyoto in
facilitating the passage of the protocol, the chair of the negotiations, Ambassador Ral Estrada-
Oyuela, called Article 12 the Kyoto Surprise. The CDM originated from a proposal made by
Brazil in the lead up to the Kyoto meeting for a Green Development Fund (GDF) supported by
countries who fail to comply with commitments. The GDF would be used to support adaptation
and mitigation projects in developing countries. As negotiations progressed, it became clear
that developed countries were strongly opposed to penalties for noncompliance. As a result,
Annex-I country non-compliance was taken out and replaced with project-based emissions
trading. Developing countries maintained that responsibilities to mitigate greenhouse gases
should be based on each countrys historic emissions rather than present contributions to
global warming. Instead of capping non-Annex-I (developing countries) emissions, the proposal
suggested they be given time for economic development before taking on reduction targets.
Taking into consideration Brazils initial proposal, the CDM focuses on mitigation projects
financed by Annex-I parties in developing countries (Linnr & Jacob, 2005, p. 408).
Putting it in a slightly different way, the CDM emerged as an initiative of less-developed
countries that perceived the Kyoto Protocols emissions-reduction mandates as a threat to their
development plans. By incorporating a high-powered market mechanism to channel resources
for development activities to less-developed countries, the CDM tempered opposition to Kyoto
and its possible negative effects on growth in the developing world. In this way, the CDM can
be seen as a compromise on the need to achieve reductions in GHG emissions but also allow
development to continue unhindered. One researcher put it this way: In the developed world,
-
7/31/2019 Clean Development Mechanism CDM DP Final
12/84
12
the name of the game is balancing political will with the costs of reducing GHG and the risks of
climate change; in the developing world, the main concern is development and adaptation (
Bozmoski, Lemos, & Boyd, 2008, p. 19). The ostensibly win-win nature of the CDM at its
inception supported the interests of diverse actors including policymakers in developing
countries; business groups in developed countries; development practitioners;
nongovernmental organizations; and community leaders looking for additional approaches to
improve the lives of those in less developed countries. These diverse interests are enshrined in
Article 12 and help to understand both the CDMs dual objectives and why it was a crucial
component in the final acceptance of the Kyoto Protocol (Alexander Bozmoski et al., 2008, p.
20).
2.1 Clean Development Mechanism Project Cycle
Unlike allowance trading in which parties are granted a quota of emission credits and
may then trade under this cap, the CDM is project-based. New credits are continuously being
created as new projects are verified. CERs are fungible with other carbon credits under the
Kyoto framework and can be traded on ET exchanges like the European Emissions Trading
Scheme (ETS) (Boyd et al., 2009, p. 821).
The CDM is a project-based system that generates credits only after individual projects
are approved by the regulatory body. While many developed countries and regional groups
have cap-and-trade systems, the CDM remains the only existing regulatory mechanism that
allows for pricing greenhouse gases in developing countries. A CDM project qualifies through a
clearly defined process designed to measure and verify emission reductions. Before generating
income, a project must go through the following steps:
-
7/31/2019 Clean Development Mechanism CDM DP Final
13/84
13
During the Project Design phase, a standardized Project Design Document (CDM-PDD)
must be completed with information about the proposed project activities and the parties
involved. The CDM-PDD is submitted along with the baseline and monitoring methodology that
will be used to determine the total emissions reduction of the project activity. The Project
Design must then be validated independently by a designated operational entity (DOE) against
the requirements of the CDM. The host country designated national authority (DNA) must also
approve the project (including its impact on sustainable development). After validation, the
project can be registered with the CDM Executive Board. Registration is a prerequisite for
verification/certification and issuance of Certified Emission Reduction credits. During the
Verification/Certification phase, periodic independent review of the project by the designated
operational entity verifies the monitored reductions in GHG that have occurred as a result of
the project activity. Certification is the written assurance by the designated operational entity
that GHG reductions were verified during the specified time period of the project activity
(CDM: Guide to do a CDM project activity,).
2.2 Example of a Hypothetical CDM Project
Norway may finance an electricity cogeneration project at a sugar plant in Brazil. The
project would, in turn, generate certified emission reductions (CERs), each of which
represents a one-ton reduction of carbon dioxide (CO2) equivalent. If Norway cannot
Project Design Validation Registration Monitoring
Verification andCertification
Issuance ofCERs
Distribution ofCERs
-
7/31/2019 Clean Development Mechanism CDM DP Final
14/84
14
meet all its Kyoto commitments through domestic action, or if it is cheaper to fulfill those
commitments by reducing emissions in a less-developed economy, Norway may either
sponsor the cogeneration project and deduct the ensuing CERs from its domestic
commitments, or, alternatively, Norway may purchase CERs generated unilaterally from
another sugar plant that financed its own CDM project.
5
Brazil and Norway would bothbenefit in this hypothetical deal. Revenue, and perhaps technology, would flow to Brazil;
Norway would shrink its compliance costs; and lower overall costs would accommodate
more aggressive global targets (Alexander Bozmoski et al., 2008).
2.3 Description of Actual CDM Projects
In contrast to the win-win picture painted above, initial research into actual projects
both verified and still in the CDM pipeline showed that the host country (Brazil above) may not
receive the kind of sustainable development and technology transfer benefits that the rhetoric
implies. The majority of CDM projects to date with the highest CER issuance can be seen in
Appendix, Table 1 and graphically in Figure 4. As the table illustrates, the bulk of CERs come
from end-of-pipe projects that eliminate NO2 and HFC-23. As these are potent greenhouse
gases, projects like these generate an enormous amount of CERs making them very profitable in
comparison to smaller scale projects that might contain more sustainable development
attributes.
As the CDM has matured, there is growing evidence that the low-hanging fruit of high-
CER industrial gas projects have been picked and there is a clear trend towards smaller-scale
renewable energy project, energy-efficiency and waste gas capture projects that have more of a
technology transfer and SD benefit to host countries.
5Private companies also sponsor, originate, and trade certified emission reductions (CERs).
-
7/31/2019 Clean Development Mechanism CDM DP Final
15/84
15
3. The CDM and Sustainable Development (SD)
Sustainable Development is defined and measured in many different ways depending on
the context. A multi-dimensional concept, measurement of SD often encompasses
environmental, social, and economic indicators. In their review of the sustainable development
contributions of the CDM, researchers Martin and Fankhauser compare these dimensional
indicators of SD as a set of assets that, if declining in value, are considered on an unsustainable
development path where future well-being is less than current wellbeing (Fankhauser &
Martin, 2010). The assets include physical, social, and natural capital.
Does the CDM meet its objective to assist Partiesnot included in Annex-I in achieving
sustainable development and in contributing to the ultimate objective ofthe Convention? As
mentioned in the history of the CDM, one of the factors underpinning developing country
support for the Kyoto Protocol is the idea that the CDM is not simply a market tool for lowering
emissions but one that delivers concrete benefits in the form of sustainable development on
the local and national levels (Boyd et al., 2009, p. 828). Evidence suggests that the CDM is
proving to be a successful tool for reducing Kyoto compliance costs in developed countries and
spurring greenhouse gas abatement in rapidly industrializing countries. However, how is the
CDM contributing to sustainable development in project host countries?
The question of whether the CDM is promoting sustainable development is framed by
some primarily in terms of whether it is promoting renewable energy technologies in
developing countries and thus assisting in the transition away from fossil fuels. Current
evidence shows that most industrialized country governments and corporations are using the
CDM only to reduce the costs of complying with their Kyoto targets and as such are searching
-
7/31/2019 Clean Development Mechanism CDM DP Final
16/84
16
for projects that deliver large volumes of cheap credits (like N2O and HFC-23 industrial gas
projects). These projects shift the location at which emissions reductions are made without
delivering additional sustainable development benefits to host countries and do not catalyze
fundamental shifts in energy production and use (Pearson, 2007, p. 247). Others view
sustainable development more broadly than simply a switch to renewables. Nathan Hultman of
the Brookings Institute argues that CDM projects could be construed as having an SD element
if they contribute to local environmental benefits, job growth, income equity, technology
development, or additional energy infrastructure in developing nation economies (Nathan E
Hultman et al., 2009, p. 121).
3.1 Tension within the CDM
Many scholars have criticized the
CDM in practice for not realizing the
sustainable development benefits
envisioned in its formation. Vague SD
criteria and no mandated proof for meeting
those criteria leave project developers free
to improvise and ignore priorities of local communities (Alexander Bozmoski et al., 2008).
Simply put, there seems to be an unavoidable trade-off between the CDMs dual mandates to
reduce emissions efficiently and spur sustainable development. As one scholar puts it, the
CDMs first mandate to help reduce Kyoto compliance costs is all but making impossible the
fulfillment of its second mandate to promote sustainable development(Pearson, 2007, p. 247).
Despite years of successful engagement of host-country actors in carbon abatement, attraction
-
7/31/2019 Clean Development Mechanism CDM DP Final
17/84
17
of industrial country investment in developing countries, and lowered mitigation costs for
developed countries, initial analyses of CDM project documentation point to few local co-
benefits (Alexander Bozmoski et al., 2008, p. 22). The original promise of supporting
sustainable development generated high expectations. Research is showing that in many cases,
those expectations are going unfulfilled. CDM projects to date show both a preference for
rapidly industrializing states over less developed ones and a distribution of carbon revenue that
benefits large industrial actors over local populations. Rather than facilitating a transition to
low-carbon development, the CDM was initially criticized by many for subsidizing the nylon,
fertilizer, and refrigerant industries in a few large developing countries (Wara, 2007). One way
the CDM has been characterized is as a race to the bottom. A simplified explanation is that
market incentives do not attract investors to the projects with the strongest sustainable
development links. Market actors find low-cost, high yield projects and crowd out projects with
links to development and smaller returns. Host country governments competing for investment
also have little incentive or power to impose sustainable development criteria on projects.
Economies of scale and high transaction costs simultaneously hurt small, more sustainable-
development oriented projects.
Due to the market-based structure of the CDM, developing countries have few
incentives to pursue stringent SD criteria as they are effectively competing for CDM projects
and rigorous standards will likely deter potential investors by raising the cost of developing a
project. A study of the CDM projects in India show that it is easy to get a project approved on
SD grounds. Because the CDM encourages investors to seek out the lowest-cost reductions,
projects that make considerable contributions to SD may be at a disadvantage. Evidence shows
-
7/31/2019 Clean Development Mechanism CDM DP Final
18/84
18
that some of the most attractive projects to investors, with high CERs produced, have a
relatively small impact on sustainable development, and the CDM as currently structured does
not provide incentives for projects that exceed minimum SD standards. (U.S. GAO, 2008)
3.2 How CDM projects may contribute to SD
CDM projects can contribute to sustainable development in two ways: the project
activity may contribute directly to SD, and/or the revenues that the project generates may be
recycled into activities contributing to sustainable development. Most research has focused on
the direct contribution of CDM projects. Several methods have been proposed to assess the
sustainable development score of CDM projects (e.g., Thorne and La Rovere 1999; Sutter
2003; The Gold Standard 2006). The consensus in the literature is that energy efficiency and
renewable energy projects tend to make a strong contribution to SD while HFC-23 and N2O
destruction projects have little to no SD impact. Other project areas like landfill gas capture
(LFG) and hydro are debated as to their SD contributions. Beyond the direct contribution,
projects should also be evaluated based on rents used to promote sustainable development.
China has enacted a 65% tax on CERs generated by HFC-23 projects. The revenue is to go into a
fund to finance climate-change related activities. LFG projects also generate revenues that
municipalities could use to improve waste collection services. This secondary SD contribution is
even less documented than the direct SD contribution written in the project documents and
makes the overall contribution of CDM projects to SD arduous to assess.
-
7/31/2019 Clean Development Mechanism CDM DP Final
19/84
19
CDM and China
To make certain the CDMs contribution to SD in host countries, it is critical that host
nations clearly establish the criteria projects should meet and that investor country
governments and investors are aware of these criteria. China set an example by introducing a
differentiated income tax for HFC and N2O projects because of their low sustainable
development benefits and low costs. Not only does this tax generate revenue for China that
could be used for sustainable development purposes, it also provides incentives to move away
from projects with little or no SD benefits. Some researchers suggested that Annex-I investor
countries could also set an example by only investing in projects that have demonstrated SD
benefits (van Asselt & Gupta, 2009, p. 365).
Sustainable Development Documentation:
The project host country designated national authority (DNA) must approve the
sustainable development component of the project as outlined in the project design document
before it can be registered with the CDM board. Does the letter of approval from the DNA
constitute a sufficient test that the project is contributing to SD? Are stakeholders fairly
consulted? The literature seems to agree that DNA capacity varies widely and it seems doubtful
that many can assess whether the project meets the countrys SD criteria (Beg et al, 2002). The
stakeholder consultation process could also be improved to be more inclusive and provide an
opportunity for more discussion (Lecocq & Ambrosi, 2007).
-
7/31/2019 Clean Development Mechanism CDM DP Final
20/84
20
3.3 Differing Perspectives on Sustainable Development and the CDM
As previously mentioned,the concept of sustainable development within the CDM can
be seen from different points of view. The following are some possible perspectives vis--vis
sustainable development in the CDM:
The Global Investment Perspective
This perspective includes both the UNFCCC and that of global investment funders. Their
objective is to maximize both the climate change reduction potential and the sustainable
development of a portfolio of CDM investments across the globe (Mathy, S., et al, 2001). SD in
this case would therefore encompass elements which enable geographic distribution across the
developing countries as well as across sectors and technologies. CDM analysis so far has shown
that a small number of developing countries (e.g. China, India, Brazil, Mexico and a few other
countries) could effectively account for almost all CDM projects if there is no concerted effort
to enable other (smaller and poorer) developing countries to access the CDM market (Boyd et
al., 2009). The UNFCCC negotiating text for the Kyoto Protocol recommends an equitable
geographical distribution of CDM projects.
The Bonn Agreement made special mention of the needs of the least developed
countries (LDCs), especially with respect to capacity building. This was later followed up in the
Marrakesh Accords which specifically setup a framework to encourage capacity building in
developing countries and countries with economies in transition (COP7).
-
7/31/2019 Clean Development Mechanism CDM DP Final
21/84
21
As the CDM is a market-based activity, it is likely to follow the dynamics of foreign direct
investment (FDI) and be constrained by the same forces. However as the CDM has an explicit
goal of promoting sustainable development (unlike FDI), there may be some innovative
investments driven by the sustainable development goals as well as the greenhouse gas
reduction goals.
The Host Countrys Perspective
The Bonn Agreement has specified that the host country is responsible for determining
the sustainable development criteria of CDM projects (UNFCCC). However, few developing
countries have actually done anything concrete in terms of either putting in place the
institutional mechanisms or developing sustainable development criteria for CDM projects. One
of the few countries to have done so is India which has developed the following criteria:
Social well being: The CDM project activity should lead to alleviation of poverty by generating
additional employment, removal of social disparities and contribution to provision of basic
amenities to people leading to improvement in quality of life of people.
Economic well being: The CDM project activity should bring in additional investment consistent
with the needs of the people.
Environmental well being: This should include a discussion of impact of the project activity on
resource sustainability and resource degradation, if any, due to proposed activity; bio-diversity
friendliness; impact on human health; reduction of levels of pollution in general;
Technological well being: The CDM project activity should lead to transfer of environmentally
safe and sound technologies that are comparable to best practices in order to assist inupgradation of the technological base. The transfer of technology can be within the country as
well from other developing countries also (CDM India, DNA Office).
-
7/31/2019 Clean Development Mechanism CDM DP Final
22/84
22
The Individual Projects Perspective
Each CDM project must be assessed with respect to sustainable development indicators
which apply in a very specific and local context. This includes carrying out appropriate
Environmental Impact Assessments (EIAs) and Social Impacts Assessments (SIAs) as required by
the national laws of each host country. An important consideration is the need for transparency
in making decision. Stakeholders and communities should be involved in decision making
(Baumert, 2002).
Host countries and project developers have approached the issue of defining
sustainable development criteria in diverse ways. In some cases, attempts to develop
sustainability criteria and indicators for specific CDM projects have been made. A few studies
attempting to assess potential SD benefits of CDM projects have shown that CDM projects have
potential for substantially enhancing sustainable development locally and nationally if they are
designed with the SD goals as part of their criteria(Huq & International Institute for
Environment and Development., 2006).
A Development Agencys Perspective
During the negotiation of the CDM, it was agreed upon that it should only support
projects which represent additional resources to those provided by OECD countries under their
Official Development Assistance (ODA). In other words, the CDM should not support
development projects that otherwise would have been funded by ODA. However, given the
development objective of the CDM, the question as to whether development aid should be
used to finance CDM projects has not yet been resolved. It is a difficult question to answer
definitively. However, as one of the objectives of the CDM is to promote sustainable
-
7/31/2019 Clean Development Mechanism CDM DP Final
23/84
23
development in developing countries, it may be possible for development agencies to fund
certain activities related to the CDM (Cosbey, 2005). These could include capacity building for
least-developed countries who may not be able to attract projects from the private sector
market on their own. In addition it is possible that a part of the CDM market may put a higher
value on the sustainable development elements of certain projects than the price of their CERs.
For example, a private investor may be implanting a social or environmental responsibility
initiative. There is some evidence already from the experience of the World Banks Prototype
Carbon Fund that investors value projects with clear sustainable development benefits higher
than others (World Bank PCF, 2001).
3.4 Host country requirements to ensure sustainable development benefits
from CDM projects
As per the Bonn Agreement, the responsibility for ensuring the sustainable development
objectives of CDM projects rests with the host country. As discussed however, very few
developing countries have been able to establish procedures for screening CDM projects
against their own sustainable development criteria (if they have established any). Most
developing countries have little understanding or institutional capacity to perform a national
level assessment and screening of CDM projects for their sustainable development potential.
Some of the lessons of a 2001 needs assessment carried out by UNITAR in reference to the
CDM, sustainable development, and capacity building are summarized below:
Institutional mechanisms
Host countries for CDM projects need to put in place the requisite institutional
mechanisms for evaluating CDM projects. This requires considerable institutional capacity
-
7/31/2019 Clean Development Mechanism CDM DP Final
24/84
24
strengthening and training of the main participants as the CDM is a new type of investment
instrument dealing in a new and unfamiliar commodity (CERs). Experience so far has shown that
it often involves a number of ministries (Law, Environment, etc.) as well as other stakeholders.
Compatibility with national sustainable development goals and strategies
After the UN Conference on Environment and Development in 1992, many countries
prepared national strategies for sustainable development (NSSDs). Host countries should
develop criteria for compatibility of CDM projects with their NSSDs.
Monitoring and reporting mechanisms
If sustainable development impacts within the CDM are going to be taken seriously, host
countries also need to ensure adequate monitoring and reporting of each individual project
with respect to its SD indicators and have the capacity to approve and certify compliance with
those indicators (Huq & International Institute for Environment and Development., 2006).
3.5 Applying Sustainable Development Criteria to CDM Projects
A question that arose when attempting to define the sustainable development objective
of the CDM was whether non-Annex-I parties should establish their own standards and criteria,
or whether international standards or rules should be formulated. Most parties agreed that
non-Annex I parties hosting CDM projects are in the best position to evaluate the sustainable
development attributes of projects (UNFCCC 2000). The Marrakech Accords afterwards
affirmed that it is the host Partys prerogative to confirm whether a clean development
mechanism project activity assists it in achieving sustainable development (UNFCCC 2002).
-
7/31/2019 Clean Development Mechanism CDM DP Final
25/84
25
Non-Annex-I countries can therefore define the sustainability requirements for CDM
projects in their country however they wish. At the same time, most individual countries do not
have the market power to significantly influence the global market price for emission
reductions. Competition in attracting CDM investments may therefore create an incentive to
set low sustainability standards in order to yield more projects with low GHG abatement costs.
This could lead to the aforementioned race to the bottom in terms of sustainable
development standards as non-Annex I parties try to undercut each other to attract CDM
investments. This is another way of stating the clear trade-off between the two objectives of
the CDM cost efficient emission reductions and contribution to sustainable development.
Annex-I countries profit from lax additionality6
requirements as this strengthens the
objective of cost-efficient emission reductions. The current absence of international
sustainability standards in combination with a highly competitive supply side of the CDM is
likely causing a trade-off in favor of the cost-efficiency objective. Neither Annex I countries nor
single non-Annex I parties have direct incentives to apply strict sustainability criteria. It is
therefore vital that designated operational entities (DOEs) and other observers critically
monitor CDM activities to ensure that the SD objective remains meaningful(Sutter & Parreo,
2007).
6Article 12.5(c) of the Kyoto Protocol states that only emission reductions that are additional to any that would
occur in the absence of the certified project are admissible.
-
7/31/2019 Clean Development Mechanism CDM DP Final
26/84
26
4. Geographic Distribution of CDM Projects
Despite the initial enthusiasm of the CDM as a tool for international development, the
distribution of CDM projects has largely been concentrated in two continents: Asia and Latin
America. Only 2.5% of CDM projects have been established in Africa, and the dominant project
types are HFCs and N2O projects7, with half of all HFC projects located in China (Boyd et al.,
2009, p. 830). A further possible cause of the inequitable distribution of projects has to do with
the complex process of project implementation and the large transaction costs incurred. As
potential hosts of CDM activities, all non-Annex-I countries currently follow the same set of
rules, without any distinction as to their economic or human development characteristics or
national GHG emission patterns (De Lopez, Tin, Iyadomi, Santos, & McIntosh, 2009, p. 439). This
seems egregious given the incredible diversity of both emissions and resources/capacity
7HFC (Hydro fluorocarbons) and N2O (Nitrous Dioxide) are industrial waste gases. They are created and released
in the production of certain refrigerants. Both of these gases are extremely potent GHGs.
CDM Project Distribution UNFCCC CDM
http://cdm.unfccc.int/Projects/MapApp/index.html
-
7/31/2019 Clean Development Mechanism CDM DP Final
27/84
27
between rapidly developing countries in Asia like China and India; and least-developed
countries like those in Sub-Saharan Africa. As it was anticipated that CDM projects might
gravitate toward a few countries with high greenhouse gasabatement potential, Annex B8
countries agreed in the 2001 Marrakech Accord to help build institutional CDM capacity in the
UN-designated Least Developed Countries (LDC) and Small Island Developing States (AOSIS) (
Bozmoski et al., 2008, p. 20).
According to an expert panel petitioned by the U.S. Government Accountability Office,
the concentration of projects can be explained by two primary factors. First, the relatively large
economies in China and India supply a higher number of emission reduction opportunities in
the form of energy and manufacturing sites. The institutional capacity of these countries is also
developed to the extent that they can handle a large flow of projects. While a source of
criticism, it is important to note that China and India are expected to be the fastest growing and
largest sources of future emissions. The CDM could enhance these countries willingness to
engage in dialogue over international climate change policy. The numerous projects in China
and India could create potential buy-in for further actions that will be needed to reduce GHG
concentration (U.S. GAO).
As a way to highlight sustainable development as a goal for CDM projects, some CDM
analysts have argued for linking CDM sustainability goals with the Millennium Development
Goals (MDGs), a United Nations-backed set of international development goals including the
reduction of extreme poverty, fighting disease epidemics, improving health, etc. For a variety of
8Annex B countries are a subset of Annex I countries. Annex B countries include all developed, industrialized
countries with a GHG Emission Limit (cap).
-
7/31/2019 Clean Development Mechanism CDM DP Final
28/84
28
reasons, including the general investment climate and institutional capacity; the poorest areas
that MDGs are intended to address repel CDM investment. As a result, about 70 percent of
CDM projects and 75 percent of CERs expected by 2012 are situated in China, India, and Brazil;
while slightly more than 1 percent of CDM projects and less than 3 percent of 2012 CERs are
hosted in sub-Saharan Africa (Alexander Bozmoski et al., 2008, p. 27).
5. CDM Change over Time
Though Article 12 of the Kyoto Protocol set out important principles, the CDM was little
more than empty words after Kyoto. The main operational guidelines of the CDM were not
agreed upon until November 2001, as part of the Marrakech Accords. The process of launching
the CDM was completed in 2003 with the agreement over the rules governing forestry-related
CDM projects (LULUCF).
The CDM turned out to be particularly controversial among the flexibility mechanisms
because it creates new emission credits. The additionality requirement specifies that only
emission reductions that are additional to any that would occur in the absence of the certified
project are admissible. But the counterfactual is impossible to observe, and open to deliberate
manipulations. Since both the buyer and the seller of emission reductions have an incentive to
inflate the baseline and therefore reap more credits, the risks are high that the CDM may create
a major loophole in the Kyoto Protocol and endanger the emissions reductions mandate. The
pressure was thus very strong for the CDM to prove beyond a doubt that it was
environmentally additional. This had two major consequences. First, it was decided that
additionality would be tested on a project-by project basis, and not at the program level as
-
7/31/2019 Clean Development Mechanism CDM DP Final
29/84
29
some had originally envisioned. Second, the Executive Board (EB) of the CDM took a very
conservative approach to the validation of emission reductions. The balance between the
climate change mitigation and development objectives of the CDM was the subject of intense
discussions. Of particular importance was the distribution of rents between the North and the
South: the risk was that the North would purchase emission reductions cheaply by harvesting
low-hanging fruits from the South (Hourcade and Toman 2000). It was eventually agreed that
it would be left to the host country to determine whether a particular CDM project is
compatible with its sustainable development priorities (Lecocq & Ambrosi, 2007). As this study
illustrates, the debate over the relationship between the CDM and sustainable development is
far from over.
There is some evidence that the quality of projects in terms of development will
increase as the number of cheap, low-hanging fruit projects decrease. Current data have
begun to show a decrease in industrial gas projects and an increase in renewable energy and
energy-efficiency projects, which have the potential to confer long-term sustainability benefits.
However, given the CDMs market-based design encourages its participants to pursue low-cost
projects, it may ultimately be difficult for the CDM, as currently structured, to make significant
contributions towards sustainable development goals(U.S. Government Accountability Office).
Fast Growing Market
The growth of the CDM market can be seen in the annual number of projects submitted
for validation. This number has grown exponentially from 5 in 2003 to 58 in 2004, 491 in 2005,
and 676 in the first three quarters of 2006 (Fenhann 2006). Overall, a total of 2062 projects
-
7/31/2019 Clean Development Mechanism CDM DP Final
30/84
30
totaling some 2400 MtCO2e
have been registered as of the
end of 2008 with an additional
2000+ in various stages of
design or validation (UNFCCC).
See Appendix, Figure 2 for
current project totals and
status and Figure 3 for a breakdown by project category.Another indication of the rapid growth
of the CDM market is the number of CERs issued. The chart at right from the UNEP RISO Centre
shows the growth of total expected accumulated CERs by 2012. It also illustrates the plateau of
industrial HFC and N20 destruction projects as a percentage of total CERs. Recently the growth
of CDM projects has slowed given the uncertainty surrounding the global climate change
framework post-2012.
6. Institutional Analysis of the CDM
Given the background laid out in Sections 1-5 above, it is clear that the regulatory,
political, and economic complexity of the CDM make it a difficult subject for simple analysis.
Using the tools of institutional and policy analysis, the following sections bravely attempts to
uncover the underlying reasons behind the CDMs poor performance in regards to its
sustainable development objective.
6.1 CDM and Transaction Costs
The CDM functions as an offset system that allows emitters to purchase trading rights
from outside the regulated group (Annex-I) from a project developer who undertakes an
-
7/31/2019 Clean Development Mechanism CDM DP Final
31/84
31
activity to reduce emissions against business as usual activities. Tom Tietenberg and others
when reviewing other emissions trading schemes like the U.S. Clean Air Act cautioned against
offset and crediting programs. Their study found these programs contained rigid procedural
requirements for reporting and approval by authorities that turned trades into rule-making
events. The report concluded that the U.S. history of credit trading demonstrated the tension
between the need for high levels of government oversight to ensure credit trades are
legitimate, and the high to very high transaction costs such oversight details(Tietenberg, Grubb,
Michaelowa, Swift, & Zhong Xiang Zhang, 1999).
More recent studies have come to similar conclusions that transaction costs were
excessive yet necessary to prevent paper reductions.
6.2 Stakeholder Analysis
Stakeholder
Group
Interest
Level In
GHG
Reductions
Interest Level
In Sustainable
Development
benefits
Resources Capacity to
Mobilize
Position on CDM
Reform to
include more SD
measuresAnnex-I High Medium High High Negative
Project
Investors
High
(produces
more CERs)
Low
(higher cost)
High High Negative
China, India,
Brazil
Medium High High Medium Neutral
Lesser
Developed
Countries
Low High Low Medium Positive
NGOs High High Medium Medium Positive
Local Project
Participants
Low High Low Low Positive
-
7/31/2019 Clean Development Mechanism CDM DP Final
32/84
32
The stakeholder analysis shown in the table above compares those groups most
involved in the CDM: how they view its two primary objectives; how capable they are of
mobilizing resources; and whether their position on CDM reform is negative or positive. The
analysis shows that the most powerful actors are much more concerned with reduced GHG
emissions than with promoting sustainable development benefits in host countries. Less
powerful actors including NGOs, local project participants, and project host countries (including
least developed countries) are aligned in favor of reform in the CDM to support the sustainable
development objective. Annex-I countries and project investors are less concerned with
sustainable development and negative on any CDM reform that would lead to a less efficient
outcome in terms of GHG emissions reductions. Of particular interest are the emerging
economies of China, India, and Brazil. Expected to be the highest generators of GHG emissions
in the coming years, these nations are garnering significant investment form the CDM as
currently established. With more projects and thus more experience, these nations have also
developed higher capacities to engage with project developers and the CDM regulatory
apparatus. As exemplified by Chinas sustainable development levy on industrial gas projects
and Indias stricter SD criteria for project approval, these countries are finding ways to benefit
from the CDM without pushing for significant reform. Stakeholder support will be critical for
any attempts to significantly alter the CDM. As China, India, and Brazil gain more and more
projects, lesser developed Non-Annex-I nations may find themselves without the leadership
and resources to push for anything but gradual reforms in favor of the CDMs SD objective.
-
7/31/2019 Clean Development Mechanism CDM DP Final
33/84
33
6.3 CDM Additionality and Sustainable Development
A core requirement of CDM project approval is that it passes the additionality test. A
project that would have occurred without the CDM will not be approved because the CDMs
purpose is to efficiently reduce overall emissions, not to subsidize business as usual
development. Many sustainable development projects, especially those focused on renewable
energy, offer economic benefits and probably do not need CERs to make them attractive to
developers (Boyle, Kirton, Lof, & Nayler, 2009, p. 20). Those who are concerned about the
additionality requirement are increasingly questioning the growing number of sustainable
energy projects in the CDM pipeline. Others are advocating that the additionality requirement
is too stringent; it is both difficult to prove and costly to monitor. This trend has the possibility
to compromise the environmental integrity of the mechanism going forward.
6.4 One Instrument for Multiple Goals
As previously mentioned in the introduction, the CDM was a last minute compromise
between developed and developing nations.
As often happens in international negotiations, the agreed text left many ambiguities
unresolved. First, parties differed in their interpretation of the new emphasis on
development. Most developed countries still viewed the CDM as a way to gain access to
cheap mitigation opportunities in developing countries, and thus to reduce their
mitigation costs. But developing countries were looking at the CDM as a new channel for
development assistance. These two interpretations of the CDM are not necessarily
compatible (Grubb et al. 1999).
As it is primarily structured as a market mechanism, is the CDM an appropriate
mechanism to achieve other objectives besides efficient GHG reductions? The CDM is one
policy instrument chasing two primary objectives. Economist Jan Tinbergen set forth the
-
7/31/2019 Clean Development Mechanism CDM DP Final
34/84
34
principle that for every independent policy goal we must have an independent policy
instrument (Tinbergen, 1958). In other words, it is very difficult to hit two birds with one
stone. This criticism can be applied to the CDM because as stated previously, the evidence
suggests that the CDM as currently designed is unable to achieve both of its objectives (efficient
emission reduction and contributions to sustainable development). The inherent trade-offs
between the two objectives results in either a lackluster contribution to sustainable
development or lowered environmental integrity of the mechanism and excessive transaction
costs.
7. Problem Statement and Research Question
Article 12 of the Kyoto Protocol requires the CDM to promote sustainable development
in project host countries. Evidence suggests that this mandate is not being implemented
effectively because of the incentive structure of the offset market, which favors the lowest
cost/highest CER projects. Given that the sustainable development goal of the CDM is vital to
the political consensus in the UNFCCC, how can the incentive structure of the CDM be reformed
so more projects promote sustainable development? Can incentives be modified to encourage
more geographic diversity in CDM projects? Can this be done while still maintaining the
environmental integrity of the mechanism?
7.1 Current Reforms
Recognizing some of the problems of the CDM, the UNFCCC has instituted reforms
including those below:
-
7/31/2019 Clean Development Mechanism CDM DP Final
35/84
35
1.Adaptation Levy- 2% on revenues from the sale of Certified Emissions Reductions paid into
an adaptation fund for particularly vulnerable countries (levy not applied to LDC country
projects).
2. Nairobi Framework initiative aimed at building CDM capacity in lesser developed nations.
The Framework consists of five objectives considered to be key priority targets in order
to move the CDM forward in the beneficiary countries:
Build and enhance capacity of DNAs to become fully operational
Build capacity in developing CDM project activities Promote investment opportunities for projects
Improve information sharing/outreach / exchange of views on activities / education and
training
Inter-agency coordination.
All agencies that are currently partner to the Nairobi Framework make a concerted
effort to provide assistance to sub-Sahara African countries to enable them to identify, develop,
submit and process CDM projects that will eventually lead to a considerable increase in CDM
penetration in the region. As part of these activities, the agencies have agreed to join forces to
map the CDM potential in sub-Sahara Africa (by country and key sector), taking into account
the emission reduction potential of each sector as well as the various barriers. This mapping
should be a helpful tool for potential investors (Nairobi Framework).
3. Programmatic CDM - Aggregation of individual projects to reduce transaction costs and give
more incentives to undertake smaller projects. Most experts in the literature approve of the
programmatic approach because it helps to promote projects that may result in significant GHG
emissions reductions and SD benefits but are not viable on an individual basis.An example
-
7/31/2019 Clean Development Mechanism CDM DP Final
36/84
36
would be a program that provides energy-efficient light bulbs to a significant number of
households. Bundled together, the transaction costs would be distributed over a group of
activities. Initial evaluation of Programmatic CDM show it to be challenging to design a
methodology to verify emission reductions on a programmatic scale - it may be difficult and
costly to take a sample of households in order to demonstrate that issued light bulbs are being
used and emission reductions are achieved (U.S. GAO).
7.2 Possible Policy Alternatives
A project that does not contribute to SD does not pursue one of the goals of the CDM,
and should therefore not be eligible to receive CERs. Evaluating the CDMs project cycle,
Alexander Bozmoski, a researcher concerned with risk perception in carbon markets, points out
how the sustainable development aspect of CDM projects is not treated with the same
seriousness as the emissions reductions requirement.
Within this project cycle, the sustainability requirement of the CDM is satisfied in two
steps. First, at the outset, the hosting country (through what is termed a designatednational authority) issues a letter of approval confirming that the project design con-
forms to a set of criteria established by the country. However, the designated national
authority is sometimes just one officer. In such cases, the responsibility of deciding
whether to grant country approval for a CDM project, which includes judging whether
the project contributes to sustainable development, sometimes falls squarely to a single
government official. Second, before a project can be approved by the CDM Executive
Board, a separate firm (called a designated operational entity) must validate the
project, including its contribution to sustainable development (as defined by the host
countrys designated national authority). It is only in these first two phases in the projectcycle that the sustainable development requirement is actually considered.After these
early stages in the project cycle, which can last many years, there is no verification or
monitoring process for the sustainable development component. Thus, while emissions
reductions are painstakingly measured and monitored and their global effect accounted
for, fulfilling the sustainable development requirement is often limited to bureaucratic
-
7/31/2019 Clean Development Mechanism CDM DP Final
37/84
37
formality, hampered further by a multiplicity of competing scales of governance (
Bozmoski et al., 2008, p. 27).
As only the carbon benefits are valued on the carbon market, there is a failure to
recognize and respond to or promote the non-carbon benefits of CDM projects. There are three
possible ways of dealing with this dilemma:
1) Let the CDM do what it is doing well act as a market mechanism to achieve GHG reductions
cost effectively and leave the achievement of other objectives to other instruments, such as
multilateral funding mechanisms.
2) Focus the CDM much more towards other objectives, including its contributions to SD, the
transfer of clean energy technologies, and an equitable geographical distribution. Projects that
contribute to these goals will be prioritized and projects not likely to contribute will be
excluded.
3) The CDM could continue to be gradually fine-tuned to achieve various objectives
simultaneously.
Below are some possible avenues for policy reform of the CDM that that fit into one of
the above three groupings:
1. Adjust the price of CERs to better align incentives with development priorities (CDCF)
Put a price premium on CERs from renewable energy projects in Least Developed
Countries. This would make more development-friendly projects competitive with industrial gas
projects in China (Del Ro, 2007). The premium could come from dedicated carbon funds or
developed country governments.
-
7/31/2019 Clean Development Mechanism CDM DP Final
38/84
38
Strength: Putting a price on sustainability will give incentives for project investors to finance
and develop more geographically diverse projects that are focused towards energy efficiency
and renewable energy.
Weakness: How to decide the price premium if it is set too high, it could lead to problems
with additionality and hurt the environmental integrity of the CDM. It is difficult to measure
local SD co-benefits in monetary terms.
2. Assign Quotas for high sustainability projects or country quotas to spread the geographic
distribution of projects (CDCF)
Establish minimum quotas for high sustainability projects. Furthermore, all or several
Annex-I countries could commit themselves to purchasing a minimum quota of projects with a
high level of sustainable development benefits (Olsen, 2007).
Strength: Increased number of projects with high-sustainability benefits.
Weakness: Fewer projects with high emissions reductions.
3. SD Certification - Sustainability Labeling (Gold Standard)
Certify CDM projects as contributing to sustainable development. Several independent
CDM Project Assessment entities have arisen to certify CDM Projects for their sustainable
development impact. Some popular examples of current sustainability labeling are: Gold
Standard Certification (GS-CERs) and the SouthSouthNorth Matrix Tool.
Strength: Increased visibility of sustainability goal through project branding. Allow investors to
profit from status/image accompanying sustainability certification.
-
7/31/2019 Clean Development Mechanism CDM DP Final
39/84
39
Weakness: Boutique and possibly expensive sustainability. The need for more validation and
monitoring may significantly increase project costs. Likely to only impact a small niche of
projects.
4. Establish a Clean Development Fund
Many climate change policy experts view any post-Kyoto agreement as including wider
developing country participation in national targets. They argue convincingly that it isnt
feasible to try to achieve the stated UNFCCC goals without involving some of the largest
emitters including China in the binding-target system.9Seeing the CDMs mixed results to date,
especially in the SD realm, it has been further argued that it should be transitioned so the
major-emitter projects are included under the Joint Implementation mechanism (major
developing countries like China would no longer be eligible for CDM projects) while SD for low-
emitting countries is addressed with a Clean Development Fund (Boyle et al., 2009). Similar
to the Montreal Protocol Fund10
, which was structured more as a concession and fund-granting
mechanism rather than an offset system; this new fund would be geared exclusively towards
public policy goals related to sustainable development and climate change mitigation. For
example, it could be targeted at low-carbon infrastructure development with poverty reduction
co-benefits in Least Developed Countries.
Strength: Two policy instruments for two separate objectives will eliminate the trade-off
problem.
997% of the global increase in energy-related emission to 2030 is expected to come from developing countries like
China, India, and several Middle Eastern nations.10
The Multilateral Fund of the Montreal Protocol was established to pay the agreed incremental costs of
developing country compliance with this agreement the cost of changing from ozone-destroying to ozone-
friendly technologies.
-
7/31/2019 Clean Development Mechanism CDM DP Final
40/84
40
Weakness: JI is not near the size or capacity of CDM currently. Major institutional changes
would be necessary to accommodate the Clean Development Fund.
The Need for Capacity Building and Governance Reform of CDM Structure
All of the above alternatives would result in better outcomes with continued reform of
the CDM towards good governance principles including societal participation, impartial rule of
law, transparency, responsiveness to stakeholders, equity and efficiency, accountability, and
consensus orientation. Projects should better reflect the proper balance of costs and benefits
to development goals as perceived by all stakeholders (investors, project developers,
communities, civil society, etc.).
Conflict is difficult to avoid given the range of competing scales of governance: CDM
projects are usually initiated at an international level, approved for their contribution to
sustainable development at the national level, verified and monitored again at the international
level, and implemented at the local level. Evidence suggests that scale is rarely explicitly
considered in the CDM. The capacity required to facilitate this extensive cooperation and col-
laboration is out of reach for many developing countries. Scale complications with decision
making and assessment, as manifest in problems of accountability and responsiveness, can help
to explain why the CDMs greenhouse gas mitigation objective has eclipsed the sustainable
development objective (Emily Boyd, 2009).
Some of the policy reform options above entail a departure from a market mechanism
to one that relies less on the private sector and more on government officials. The possibility
exists for a conflict of interest as officials could be prone to bribery and corruption. Thus, there
-
7/31/2019 Clean Development Mechanism CDM DP Final
41/84
41
is a continued need for both human and institutional capacity to building to ward off possible
threats to a reformed CDM.
8. Summary of Background and Policy Alternatives
In its review of the CDM, the U.S. Government Accountability Office was relatively
pessimistic on the future potential of CDM projects to confer long-term sustainability benefits.
Going forward, many believe the quality of projects will increase as the number of
cheap, low-hanging fruit projects decreases. Indeed, current project trends have
shown an increase in renewable energy and energy-efficiency projects, which have the
potential to confer long-term sustainability benefits, and a decrease in industrial gas
projects. However, given that CDMs market-based design encourages its participants topursue low-cost projects, it may ultimately be difficult for the CDM, as currently
structured, to make significant contributions toward sustainable development goals
(U.S. GAO, 2008, p. 50).11
The literature shows that left to market forces, the CDM does not significantly
contribute to sustainable development. It does not drive SD and does a poor job of funding
renewable energy projects with high development co-benefits (Pearson, 2007). Turning this
argument around, the real problem is that the CDM works rather well in achieving its mandate
to produce the lowest-cost emissions reductions. Because SD benefits are left out of the
market, they remain only rhetorical, non-monetized and play a limited role in producing
incentives for investors or projects. The main policy implication is how to respond to the fact
that left to market forces; the CDM does not significantly contribute to SD in developing
countries (Olsen, 2007).
11The GAOs key takeaways from its study of the CDM include: (1) the resources necessary to obtain project
approval may reduce the cost-effectiveness and quality of projects; (2) the need to ensure the credibility of
emission reductions presents a significant regulatory challenge; and (3) due to the tradeoffs with offsets, the use of
such programs may be, at best, a temporary solution.
-
7/31/2019 Clean Development Mechanism CDM DP Final
42/84
42
From a purely pragmatic point of view, it is tempting to ignore the CDMs sustainable
development mandate and focus on its success as a policy instrument for efficiently lowering
GHG emissions. This narrow view, however, misses the political implications. The legitimacy of
the CDM going forward in the post-2012 era when the first phase of Kyoto ends is dependent
on broad-based support from a diverse set of stakeholders including developing countries.
Nathan Hultman, a climate change policy expert, sums this up below:
Divorcing sustainable development from the CDM would remove incentives for broad-
based participation. International policy history underscores the importance of policies
that command confidence of a majority of countries, both developed and developing.
Ensuring broad-based participation in climate governance requires that the overallarchitecture be perceived as fair and beneficial to the development goals of all countries.
At the same time, structural reforms should respect the preliminary success of the CDM
in stimulating market innovations. Enhancing sustainability in the international climate
protection architecture is a critical element in policy that will encourage the parallel,
differentiated actions needed to protect our common future (Hultman, 2009, p. 122).
Taking Hultmans analysis seriously, this study will analyze the proposed policy reforms
to find the best route to both maintaining the environmental integrity of the CDM while
ensuring sustainable development is given the same attention in project design and
implementation as it is in Article 12 of the Kyoto Protocol.
9. Methodology
9.1 Policy Evaluation
Ex-ante evaluations will be made of proposed alternatives to reform the CDM to
strengthen its SD objective. In some cases, data will be used from proxy sources that mirror
proposed alternatives. For example, valuing credits from projects with high SD co-benefits more
than others is similar to current practice of the Community Development Climate Fund. Using a
-
7/31/2019 Clean Development Mechanism CDM DP Final
43/84
43
multi-criteria assessment of the options, this analysis will seek to find the alternative that best
achieves the CDMs two primary objectives: helping Annex-I countries comply with their
emissions reductions commitments and assisting developing countries in their sustainable
development goals, while also contributing to stabilization of greenhouse gas concentrations in
the atmosphere.
The key tools used for evaluation will be program theory models and a content analysis
of Project Design Documents (PDDs) to assess sustainable development impacts of similar
initiatives. An outcomes matrix will be used to evaluate the results.
9.2 Sustainable Development Measurement
Sustainable development is not defined by the Kyoto Protocol but the generally quoted
UN definition is a development strategy that meets the needs of the present without
compromising the ability of future generations to meet their own needs.12
This definition is
wide enough to encompass environmental, social, economic, and political sustainability. The
CDM does not provide any overarching SD standards. It is up to each host nation and its
Designated National Authority to evaluate the SD benefit of projects. Some countries like India
have defined SD criteria which they can use to assess the SD benefits of potential projects.
Other DNAs whose nations lack formal SD criteria are left to apply an abstract concept to a
concrete project. This discrepancy is reflected in the Project Design Documents. Whereas all
projects must describe the SD contribution of the project, some do so in a systematic way while
others write a vague paragraph indicating the GHG reductions that will take place due in the
12defined at World Commission on Environment and Development in 1983
-
7/31/2019 Clean Development Mechanism CDM DP Final
44/84
44
course of the project. Of course, if no GHG reductions were to take place, the project would not
even be considered for registration under the CDM.
Attempts to measure Sustainable Development
Several studies have attempted to quantify and measure the SD impact of CDM projects
based on type and size (Nussbaumer, Olsen, Development Dividend, Sutter and Parreno). Using
Multi-Criteria Analysis and other tools, these studies have generally shown what was logically
intuitive smaller-scale projects focused on renewable energy and energy efficiency have a
greater impact on SD than large gas capture projects.
9.3 Program Theory of Change Analysis
Program Theory models are logic-based outcome diagrams that demonstrate a
programs casual chain of activities leading towards desired outcomes and any key
assumptions. Using Program Theory models for each alternative will aid in evaluation and
discussion of how the selected criteria react to reform options. The steps on the diagrams that
follow are color-coded to indicate whether the activity or outcome is associated with GHG
emissions reduction (blue) or sustainable development (green). Grey-colored boxes are
administrative or process steps that all CDM projects are required to complete. By comparing
the structure of the alternative programs to the CDM Status Quo, one can see the changes in
emphasis alternatives place on sustainable development within the program design.
-
7/31/2019 Clean Development Mechanism CDM DP Final
45/84
45
1. CDM Project Status Quo
Implementation, Monitoring,
Verification of GHG reduction
b DOEs
GHG reduction goal met through
project. SD objective outcomeunknown.
Issuance of CERs
Sustainable Development
benefits not monitored or
validated
Assumptions:
Host country has established
SD criteria for the DNA to
measure project against
DNA has capacity/resources to
analyze SD impacts
Additionality requirement not
biased against projects with
high SD impact
Market mechanism doesnt
lower incentives for SD in
projects
Projects will be equitably
distributed geographically
Unverified SD impactSpecified GHG Reduction
Investor and host country
agree to undertake project
Host Country DNA approves SD
impact of project
GHG baseline measuring
methodology decided
Barrier Analysis Conducted to
assess additionality of project
Project is approved by CDM EB
-
7/31/2019 Clean Development Mechanism CDM DP Final
46/84
46
The Program theory outlined on the preceding page shows in graphical form what has
been argued in the literature the sustainable development goal of the CDM is not monitored
or validated and thus the SD impacts of projects are unknown. An important assumption about
DNA capacity and resources to evaluate sustainable development impacts of projects is not
taken into account nor is the incentive to attract project developers by offering the least-
expensive cost/highest CER output project available. Geographic distribution is biased towards
India and China because of their more developed capacities, higher number of potential large
project sites, and project-developer familiarity.
-
7/31/2019 Clean Development Mechanism CDM DP Final
47/84
47
2. Sustainability Certification (Gold Standard)
GHG reduction goal met and
verifiable SD impact made.
Issuance of GS CERs
Assumptions:
Host country has established
SD criteria for the DNA to
measure project against
Added costs of SD Assessment
and Monitoring will not make
projects uncompetitive
Projects will be equitably
distributed
Specified GHG Reduction
Implementation, Monitoring,
Verification of GHG reduction
Project is approved by CDM EB
Host Country DNA approves SD
impact of project
Investor and host country agree to