| CLIMATE |
2. CDM project eligibility criteria
The discussion of principles and criteria to be applied to CDM project appraisals presented in this paper builds on those, which were outlined in Article 12 of the Kyoto Protocol. The operational details were left undeveloped and this discussion aims to contribute to the elaboration of '...modalities and procedures with the objective of ensuring transparency, efficiency and accountability...' (Article 12.7). The analysis is broken down into the following topics:
2.1.1 Types of projects qualifying for CDM
Much has been written on the types of projects that should be allowed to qualify for CDM credits in host countries, including whether forestry and land-use change projects should be eligible and if so, under what conditions. Within the forestry, land-use and energy sectors there is considerable debate as to what constitutes a project that reduces GHG emissions and contributes to sustainable development without undermining Annex I commitment targets.
For example, the risks associated with nuclear technology render nuclear power projects unsustainable, even if they reduce GHG emissions. Similarly, if reforestation projects are admitted on the basis of acting as carbon sinks, they may actually impede local sustainable development in the form of agriculture or energy provision for people's needs.
This is apart from the theme recurrent in this paper of the potentially perverse incentives and monitoring problems that CDM projects may already pose. Nuclear energy and anthropogenic sinks are therefore widely regarded as categories that should not qualify as CDM projects. In particular, nuclear power projects should be excluded because of risks to the environment and human health. Nuclear power is also subsidy intensive at a time when the objectives of the CDM require all available support to be directed towards environmentally and technologically sustainable development. Anthropogenic sink projects should also not be made eligible. It is highly doubtful that so-called clean-coal technologies should be admitted, as they would never represent additional emissions abatement when compared to a reasonable baseline such as natural gas combined cycle plants. Large hydropower projects that have a high surface area to volume should not qualify. All CDM projects must meet the sustainable development criteria (see section 4.2).
Given that large dams which have a high surface area to volume ratio emit quantities of GHGs comparable to those emitted by coal power stations, these projects should not qualify for inclusion in the CDM. Not only are large-scale dams known to result in the loss of biodiversity and the emission of carbon dioxide via decomposing biomass, they are also often associated with the social costs of inequitable land loss and the forced relocation of minority or less affluent populations.6
Similarly, any project that is inconsistent with commitments under relevant international environmental agreements should be excluded. This paper proposes that for the first phase of the CDM, only certain energy projects and selected carbon sequestration projects that have contributed to biodiversity conservation should qualify for credits.
It is proposed that CDM projects in the energy sector be confined to
those that employ technologies and techniques which contribute to:
Article 2 of the Kyoto Protocol clearly states that: 'The purpose of the clean development mechanism [is to contribute to] the ultimate objective of the Convention, and to assist Parties included in Annex 1 in achieving compliance with their quantified emissions limitation and reduction commitments...'
A project can qualify for the CDM only if it results in 'Real, measurable and long-term benefits related to mitigation of climate change' (Article 12b), and if it results in 'reductions in emissions that are additional to any that would occur in the absence of the certified project activity' (Article 12c).
The finalisation of this criterion depends on the outcome of IPCC deliberations on the issue. In the forestry sector, projects that could qualify as much for carbon mitigation as the maintenance of biodiversity and halting desertification, are those that result in sustainable management of primary or indigenous forests and suitably longer-term afforestation schemes. In any land-use changes, respect for traditional land-use rights must be maintained.
Criterion 3: Retrospective accreditation
CDM projects may not be accredited retrospectively. The clear exception is AIJ projects that have met the additionality and baseline criteria.
Criterion 4: Real and measurable benefits
Only projects in which emissions are measurable should qualify for
CDM.
While the Protocol is clear that only projects that result in emissions reductions should qualify, it does not determine how this reduction is to be measured. Logically, the amount of GHG emissions avoided by CDM projects can be compared with a forecast of future GHG emissions in the absence of the CDM projects. Key to the debate is the question of how to assess what would have happened in the absence of the CDM and this problem introduces the concept of baselines. This issue is being keenly debated with reference to the incremental cost methodology applied to Global Environment Facility (GEF) projects to date.7 Recent evaluations of the efficacy of GEF projects found that emissions baselines were estimated subjectively and that this contributed to the opaqueness of the process of determining incremental cost analyses.8
The level at which a baseline is set will determine the amount of CERs to be generated by the investment. It follows that a higher baseline will be more attractive to both CDM project hosts and investors as the difference between the baseline and the post-CDM project scenario will result in the larger CERs, and hence a greater return on investment.
However, allowing a baseline to be set too high would create 'artificial' CERs, which would result in 'hot-air' trading and therefore undermine the original objective of the Convention and Protocol. The wide spectrum of possible future development paths in non-Annex 1 countries leads to great uncertainty in long-term baseline estimates.9
While a straightforward 'business-as-usual' baseline is attractive for its apparent simplicity, it does not take into account the dynamics of development. Development in many non-Annex 1 countries involves increasing the income of residents and providing access to adequate and affordable services, including energy services, for the urban and rural poor. Depending on which energy sources are used for this development path, rapid increases in GHG emissions could result. However, a business-as-usual baseline will not foresee this and development in low-income countries would thus have to get 'dirtier' before it could get 'clean'. In other words, the CDM could provide a perverse incentive for unsustainable development.
The use of so-called 'forward-looking, bottom-up baselines' could create tensions between real and potential emissions reductions. Its application to some projects may result in real emission increases between current levels and the proposed CDM alternatives. The criterion which requires that project activities result in real emissions reductions needs to be verified from the perspective of the current business-as-usual baseline attributable to climate related policies. This can be achieved by insisting that CDM alternatives must have lower emissions than the current business-as-usual baselines, with credit being given for the difference between the alternative and the 'forward-looking, bottom-up baselines'.
Alternatively, CDM projects that enhance the level of economic activity but have lower emission intensities than the strictly defined or conventional business-as-usual scenario could be creditable under the CDM even if they lead to emission increases. This provision would acknowledge the emissions already avoided by members of the G77 and China.10
From an administrative perspective, it is clear that the standardisation of baselines is desirable in order to minimise transaction costs and the possibility of 'hot-air' trading.11 Conversely, to apply simple baselines that discourage the 'technological leapfrog' model of development because current emissions are below average in many low-income countries would result in a lost opportunity to avoid emissions from the outset. This has to be addressed either through a CDM compatible baseline or by means of another parallel mechanism that intervenes at the time of delivery of new energy service infrastructure.12
CDM projects must result in lower emissions than the current business-as-usual
scenario, credit being given for the difference between the alternative and
the 'forward-looking bottom-up baselines'.
Perverse incentives of this sort would dissuade the implementation of voluntary regulatory instruments for improving energy performance standards. The introduction of the CDM could therefore result in a baseline 'drag'. The potential for baseline 'drag' needs to be addressed if the CDM is to enhance interest in countries reducing their own emissions and maintaining momentum towards making their economies less energy intensive. One solution would be to allow domestic activities in the development of regulatory instruments to qualify for CERs. Funds raised in this manner could be dispersed to local industries in the form of assistance for adaptation to the tightening regulatory environment.
Elimination of producer or consumer subsidies for fossil fuels should be seen as a necessary condition for CER accreditation for reforms to regulatory instruments. Only measures that set genuine incentives for emissions reductions should be accommodated in the baseline.13
The process of developing progressive regulatory instruments that have
the effect of improving performance of energy consuming devices should be
encouraged as domestic CDM projects in their own right, accredited accordingly
and banked.
Article 12.2 states that 'the purpose of the clean development mechanism is to assist countries not included in Annex 1 in achieving sustainable development…'. This implies that within the project boundary, the pillars of sustainable development would be upheld. For energy, these pillars include economic efficiency, social equity and environmental and technological sustainability.
CDM projects must contribute to sustainable development in host (non-Annex
1) countries. Sustainable development, including technical and institutional
infrastructural needs, must be elevated to a high level in assessing which
projects qualify for CDM. All CDM projects must show improvements in environmental
and social indicators (see Section 4).
Applying the pre-requisite of sustainable development to CDM projects may potentially be regarded as an imposition on the autonomy of some host countries. However, the objective of sustainable development - which most countries would argue is contained in their policies - is probably less of a problem than how the CDM defines the relationship between international commitments and the sovereignty of Parties.
Host countries, in appraising CDM projects, should stipulate how the
project relates to national public policy and how it addresses sustainable
development. Indicators to monitor sustainable energy development need to
be applied on a project-by-project basis, reflecting trends within the project
boundary and beyond if necessary.
CDM projects must supplement rather than form the basis of Annex 1 country emissions reductions. Supplementarity implies that the majority of emissions reductions should be derived from domestic action. Because of the potential of the CDM to actually increase overall emissions, it would be a prudent start to allow only a modest percentage of overall reduction commitments to be met through the CDM.
Interpretations of the pre-requisite of supplementarity vary enormously. Costa Rica and other countries that are well placed to deal with sequestration projects, suggest that the CDM should be used to fulfil a greater percentage of the reductions commitments of Annex 1 countries. Conversely, there are cases for keeping the CDM quota to a minimum. The larger the domestic quota for Annex 1 countries, it is argued, the greater the incentive for innovation and rapid achievement of economies of scale in proven clean technologies. Non-Annex 1 countries, through technology transfer, could then readily absorb the hardware and know-how of proven methods.
Yet another perspective asserts that there should be no quota whatsoever, because quotas would only reduce the funds available to developing countries for implementing sustainable development, and a high quota would discourage ambitious CDM projects. Worse still would be the fixing of separate quotas for each of the mechanisms, which would raise a host of new problems. A better way to ensure long-term innovation would be to apply a decrease in the crediting ratio of CDM projects over time.14
It is suggested that most emissions reductions need to come from domestic
action with the remainder possibly being obtained through flexibility mechanisms.
'Hot air' primarily refers to the emissions reductions that have resulted from the shrinkage of the economies of countries undergoing transition, since the 1990 emissions base year. The concept of hot air can also be readily applied to inflated or inaccurate measurement of CERs in either national reporting or in accreditation of project emissions reductions. Wherever it occurs, hot-air will present problems and if this issue is not resolved to the satisfaction of all, it could compromise the integrity of all three flexibility mechanisms.
Hot air needs to be tackled at its source, which is the problem of combining the allocation and trading of CERs.15 Perhaps the route to take is to accredit only emissions reductions that are climate policy related. This implies that only additional projects that occur as a result of national policy to reduce GHGs should qualify for CDM accreditation. However, the separation of emissions reductions due to economic shrinkage from those due to improvements in efficiency and cleaner generation, constitutes a significant methodological challenge for the Parties to resolve.
Hot air trading could seriously undermine the integrity of the flexibility mechanisms and thus should not be permitted. Alternatively, a one-off deal around historical hot air could be concluded at suitable discount rates and retired, after which time only emissions reductions attributable to climate protection measures could be certified. Another option would be to allow 'hot air sales' with mandatory investment of the proceeds in projects that assist greenhouse gas emissions reductions, but which cannot be quantified in terms of tonnes of GHGs offset. Possible projects may include:
Only emissions reduction units associated with the implementation of
climate related policy will be accredited.
A number of African authors17 have decried the inequity of the regional distribution of AIJ pilot projects - of the 75 pilots only one has been in Africa. They call for a regional quota system that would balance the allocation of AIJ and CDM projects.
It appears that other than slow bureaucracies or government 'wait-and-see' strategies, the main reason for inequitable regional distribution of projects is most likely to be found in institutional capacity shortages. Should these barriers be identified, the CDM Executive Board (or other multi-lateral agencies) could allocate resources to overcome them.
For sustainable development to be addressed in a regionally equitable
way, barriers to the balanced distribution should be tackled where possible
by the multilateral agencies or the executive board administering CDM.
Given that some CDM project stakeholders will be more limited than others in their capacity to invest resources in CDM projects, it is reasonable to assume that this limitation could have the adverse impact of preventing some parties from participating.18 In such cases it is likely that the countries most in need of the anticipated benefits of CDM projects are those with the least capacity to attract them.
The human and institutional capacity required in identifying, planning, appraising, implementing, maintaining and monitoring CDM projects needs to be built up steadily in order for Parties to participate meaningfully in the CDM. This applies equally to hosts (non-Annex 1 countries) and investors (Annex 1 and non-Annex 1 public and private entities). Capacitated non-Annex 1 countries may have greater access to projects precisely because the institutional capacity to handle these project hurdles would provide a more risk-averse investment environment. This situation would be unlikely to endure as over-subscription would result in increasingly costly emissions reductions, and cheaper CERs would be sought.
Article 12.8 requires that the COP/MOP 'shall ensure that a share of proceeds from certified project activities is used to cover administrative expenses as well as to assist developing country parties particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation'. Whether these administrative expenses include resources for institutional capacity building in non-Annex 1 countries, and whether these may only be allocated to Parties making bilateral agreements, needs to be clarified.
If the funds are only allocated to Parties that have already concluded CDM deals, this may result in the perpetual exclusion of some developing countries that do not have an opportunity to develop their institutional capacity to undertake CDM projects.
A management framework for CDM projects is required in host countries at each stage of the process, namely:
At the CDM project level, participation of the local populations at all stages of project development must be vigorously pursued. This is particularly important in projects that include land-use change.
Capacity building should be undertaken on an expedited basis to prepare
both Annex 1 and non-Annex 1 country entities as well as direct project stakeholders
for full and equitable participation in all phases of CDM projects.
Project hosts and investors (non-Annex 1 and Annex 1 Parties respectively) that participate in projects are to do so voluntarily without the coercion of, for example, linked trade deals or debt relief programmes. The institutional process that is established for project decision-making will determine the impact on voluntary participation in projects.
Participation in CDM projects must remain voluntary and independent
of other international contracts other than those directly affecting the CDM
project prospecti.
National policy will need to address the CDM to encourage good governance and democratic decision making processes regarding what constitutes a viable CDM project. To implement this policy in a participatory and transparent manner with local and national stakeholders is crucial for project success and sustainability.
National CDM policy development and institutional capacity to participate
in CDM projects needs to be undertaken prior to engagement in CDM projects.
Where neither enabling policy nor effective institutions are in place, the
CDM Executive Board should assist equitably in their development, giving priority
to the countries with the least capacity.
Parties to the FCCC are required to have ratified the Kyoto Protocol via democratic processes and to have developed enabling national policy prior to participation in CDM projects. In addition, reporting protocols ranging from project to national emissions inventories should be in place.
The time horizons for development, ratification and disbursement of funds for projects of this nature by the CDM Executive Board could be lengthy. The bureaucracy of the process may jeopardise the project's outcome, because of declining interest by major stakeholders.
Therefore a streamlined project endorsement process linked to preliminary 'walk through' audits of indicators will be useful at the initial stages of project development in order to ensure the timely release of CDM project development resources. Facilitation and guidance should be provided by accredited third parties to advise the CDM Executive Board of the acceptability of projects with respect to eligibility criteria.
The ratification process or other national policy steps could include:
Protection schemes for vegetation coverage may restrict the use of natural resources and impinge upon national sovereignty. Poor participation of stakeholders and host parties in the design and management of CDM projects may lead to increased technological dependence upon the investor country. In the worst cases, lack of technological self-reliance in host countries may lead to 'technology dumping' on the part of investor countries. In cases where challenges to sovereignty arise during CDM project cycles, the CDM Executive Board will be asked to arbitrate.
The CDM must operate with respect to the sovereignty of Parties. Should
conflicts arise, the Executive Board should arbitrate and penalise parties
that are in violation.