Criteria and Indicators for Appraising Clean Development Mechanism (CDM) Projects
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1. CDM background and operational issues
The 1997 Kyoto Protocol to the FCCC stipulates an overall GHG emissions reduction
objective by Annex I countries of 5.2 percent below 1990 levels, taking as the
comparison their emissions average in the period between 2008 and 2012. The
Quantified Emissions Limitation and Reduction Objectives (QELROS) range from
an increase of 8 percent for Australia and 10 percent for Iceland to a stabilisation
for the Russian Federation and a decrease of 6 percent for Japan, 7 percent
for the United States, and 8 percent for the European Union members collectively.
Dubbed the "Kyoto surprise," the CDM was the product of last-minute negotiations
at the close of COP-3, and it constitutes a crucial formal link between the
Kyoto Protocol and developing countries. It evolved from the Brazilian proposal
for a Clean Development Fund (CDF) in a meeting of the Ad Hoc Group on the Berlin
Mandate in 1997, just prior to COP-3. In terms of the CDF proposal, Annex I
Parties failing to comply with their assigned emissions reduction commitments
in a given budget period would pay penalties, contributing to the establishment
of the CDF. The proceeds accumulated in the CDF would be allocated to non-Annex
I Parties according to a criterion based upon their historical responsibility
for the global temperature increase. The CDF resources would fund mitigation
projects in non-Annex I countries and up to 10 percent of the proceeds would
be allocated to adaptation measures in vulnerable countries. At COP-3 in Kyoto,
the CDM evolved into a mechanism of dual purpose, as established under Article
12 of the Kyoto Protocol. The CDM aims to:
- Assist non-Annex I Parties in achieving sustainable development and in
contributing to the ultimate objective of the FCCC.
- Assist Annex I Parties in achieving compliance with their QELROS.
It was agreed that an Executive Board will supervise the CDM and will be subject
to the authority and guidance of the COP/MOP. Both public and private entities
can be involved in CDM activities.
Emissions reductions will be accounted for on a project-by-project basis and
certified by "operational entities" before designation by the COP/MOP on the
basis of:
- Voluntary participation approved by each party involved.
- Real, measurable, and long-term benefits related to the mitigation of
climate change.
- Reductions in emissions that are additional to any that would occur in
the absence of the certified project activity.
A share of the proceeds from certified project activities will be used to cover
administrative expenses and to assist developing countries, which are particularly
vulnerable to the adverse effects of climate change, to meet the costs of adaptation.
The COP/MOP will elaborate modalities and procedures with the objective of ensuring
transparency, efficiency and accountability through independent auditing and verification
of CDM project activities. As agreed at COP-4 in Buenos Aires in December 1998,
the modalities for the implementation of the Kyoto Protocol will not be defined
until at least December 2000. However, a unique feature of the CDM is that the
Certified Emission Reductions (CERs) obtained between the years 2000 and 2008
can be used to assist in achieving compliance in the first commitment period from
2008 to 2012.
Establishing sustainable development as a dual objective of the CDM was crucial
in earning the support of developing countries. Prior to this shift, there had
been some scepticism regarding the benefits of such joint implementation activities
being enjoyed equally by high and low-income countries. Moreover, the outgrowth
of the CDM from a Brazilian proposal gave developing countries a sense of ownership
of the idea3. Its workability will help ensure the effectiveness
of the Kyoto Protocol in realising its objectives and should increase the willingness
of developing countries to participate in a global emissions regime in the future4.
Nevertheless, it must be acknowledged that several key issues need to be addressed
in order to structure a CDM financial regime in such a way that the benefits
of sustainable development and the provision of cost-effective GHG emissions
reductions eventuate in practice. Thus the following questions are raised:5
- Will the development of the CDM compete with, or be influenced by, other
forms of financing for international joint ventures?
- Under which conditions might CDM projects create attractive investment
opportunities in countries with small markets?
- How might the planning, development and finance of CDM activities impact
on incentives for domestic measures in Annex I countries?
- How will the financing of CDM projects differ in countries at various stages
of market development or with different types of markets?
- How will the CDM affect the amount, timing, or distribution of Official
Development Assistance (ODA)?
- Can or should ODA be linked to capacity building or to the creation of
enabling environments that are attractive to CDM investments?
- Should ODA applied to CDM activities earn, for the "donor" country government,
a share of the CERs produced by CDM projects?
- Will investments dedicated to the creation of enabling environments be
eligible to earn CERs?
- Can or should bilateral or multilateral development finance be linked to
the creation of enabling environments that are attractive to CDM investments?
- How might mainstream operational lending of the regional and multilateral
development banks be affected by the opportunities created through the CDM?
- Under what circumstances will mainstream lending projects of the regional
and multilateral development banks be eligible to earn CERs under the CDM?
- How will the availability of investments for CDM activities affect the
funding available for GEF projects?
- Should bankable projects that are financed in part with funds from the
Prototype Carbon Fund (or similar fund portfolios) be eligible to earn CERs
through the CDM?
- How will CDM project criteria and trade measures, such as provisions for
the preferential transfer of technology, relate to the existing rules of the
World Trade Organisation?
All these questions deserve to be carefully addressed when filling the operational
gaps of the CDM.
3Sari and Meyers, 1998.
4Humphreys, Sokona and Thomas, 1998.
5Mintzer, 1999.
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