The CDM Clean Development Mechanism: is it effective?

Last November the UNFCCC (United Nations Framework Convention on Climate Change) held in Warsaw its 19th Climate Change Conference to discuss the actions in order to answer to the pressing climate change issues and look for the needed agreements.

Since it went into force in 1994, the UNFCCC as an international treaty counting 195 parties tried to set out a series of mechanisms with the goal to stabilize atmospheric concentrations of greenhouse gases (GHGs) to avoid “dangerous anthropogenic interference with the climate system”.

The main operational arm of the UNFCCC is represented by The Kyoto Protocol. Adopted in 1997, it went into force in 2005 setting emission reduction targets for the (limited number of…) developed countries who ratified the treaty. The target was to reduce emissions of six greenhouse gases (GHGs) by an average 5% (compared to levels of year 1990) in the first commitment period (2008-2012).

Once these targets have been established, the emission reductions basically acquired an economic value. There are two types of carbon market systems and three mechanisms used to facilitate emission reductions and stimulate green investments:

• cap and trade system, with the emissions trading: an emission cap is set, and countries or companies from developed countries get corresponding tradable emission allowances (called Assigned Amount Units, AAUs). The largest scheme is the European Union Emissions Trading System EU ETS.
• offsetting systems, with two project based mechanisms: offset tradable credits are issued for those projects that “produce” emission reductions (measured against a theoretical emission baseline). The two mechanisms are the JI Joint Implementation and the CDM Clean Development Mechanism, with the difference being the countries where the project is undertaken (in projects in industrialized countries for the JI, in developing countries for the CDM)

Of all the topics discussed at the Warsaw Climate Conference, in this post I’d like to focus on the CDM. I find it related to the IMSD Master because of its trigger on sustainability. Conceived as a win-win solution, the CDM has two goals:

1. to deliver results within the Kyoto Protocol (helping developed countries to reduce their emissions). Implementing a CDM project creates certified emission reductions (CERs) that can be bought by developed countries in order to meet the emission cap of the Kyoto Protocol instead that reducing their own emissions.
2. to enable countries not included in Annex I (also referred to as developing countries) to achieve sustainable development. A CDM project can bring benefits to the developing country where the project is implemented in terms of investments, knowledge transfer (green energy related) and – as already underlined – sustainable development.

The Warsaw Climate Change Conference expressed the “concern regarding the difficult market situation currently faced by CDM participants and the consequent loss of institutional capacity threatening the value of the CDM”. And the African Group “called on the developed countries, expressing disappointment with lack of progress and failure to improve the CDM”. What happened, has the CDM not been able to deliver its promises?

As for the sustainable development objective, the UNFCCC tries to assess it based on the three dimensions set by the Rio+20 Conference – social, environmental and economic – through DNA, Designated National Authorities. The main “claimed” benefit of the CDM projects is the creation of employment.

But in reality there is little evidence of clear sustainable benefits. Some of the reasons are: the developing countries hosting the CDM projects set their own sustainable criteria but their interest is to attract investments not to set too high criteria to scare money off. That’s why they reject international sustainability assessments. Also, the DNA authorities provide little or no control and follow up. Sadly, as reported by Carbon Market Watch, “sustainability benefits have no financial value in the current system, as only greenhouse gas benefits result in monetary compensation (through the generation of credits)”.

As for their capacity to ensure the inclusion of developing countries in the carbon markets (through CDM projects), there have been quite a few issues for instance related to identifying the right baseline (measure of the CERs) which was often not realistic or inflated to get more credits. Moreover, the difficult market situation and the lack of demand for CERs from the developing countries have undermined the institutional capacity of the mechanism.

The point is that the mentioned market mechanisms are cost-effective based: in order to respect the emission targets the countries / companies can decide whether it is more convenient for them to implement direct measures or else whether to buy emission allowances on the available markets.

Yet, one of the problems is that the emission cap has been set too “friendly”, assigning too large allowances: it is easy to respect the cap which is not even reflecting the actual environmental needs. Coupling this with the recent global crisis and the consequent decrease of the industrial activities, it’s possible to explain the excess of “credits” in the market and the lack of demand for CDM projects. Companies and developed countries now do not need to offset their emissions and therefore have no interest in investing in green energy projects in developing countries.

There are many more issues related to the weaknesses of the overarching structure of the Kyoto Protocol (developing countries not bound to cap, major players who have not ratified the Protocol, lack of enforcement mechanism and no sanctions) but the climate change is calling for action. That’s why there is a “growing number of initiatives, policies and programmes outside the UNFCCC actively addressing climate change” (as noted by IISD).

Looking ahead, the energy demand will increase. When looking at the estimates of the International Energy Agency in its World Energy Outlook 2013: “global energy demand increases by one-third from 2011 to 2035”. And the share of fossil fuels in the world’s energy mix will still be 76% in 2035.

Global warming should be addressed with a global policy and with the involvement of all the countries. The urgency has been dreadfully remarked just before the beginning of the Climate Change Conference by the devastating effects of Typhoon Haiyan in the Philippines, one of the most powerful storms ever, that had destructive consequences in terms of human lifes (more than 5000 deaths), property and environment.

Existing measures have not been able to tackle globally the emission levels: from 1990 to 2011 if looking at Kyoto Parties with targets, the MtCO2 has decreased by -12.1% from 8,778 to 7,713 but other countries levels have increased by +94.2% from 11,591 to 22,515. If adding the increases of international marine and aviation bunkers the total increase from 1990 to 2011 is +49.3% from 20.988 to 31.342 MtCO2. These data are taken from the IEA/OECD 2013 whose comment is that “the existing climate targets are not sufficiently comprehensive to lead to reductions in global CO2 emissions from fuel combustion”.

Here comes the Environmental Economics: maybe lowering the cap and actually setting monetary sanctions for no compliance could have an effective impact on the current scheme. As well as implementing the European 20-20-20 proposals that provides the review of the European Union Emissions Trading Scheme: to include aviation emissions into the scheme and auctioning the allowances (instead of assigning them for free).

Not mentioning the costs for the world. A driver for more powerful and binding actions should be the consideration that is cheaper to prevent environmental damages, tackling emissions for instance, than to wait and deal with the impacts: it would require an investment of about 1% of the global GDP against 5-20% of it to deal with the impacts on resources, health and on the environment (Stern Review on the Economics of Climate Change, 2006).

And, with an eye to sustainability, more efficient prevention measures could free up resources for other development goals.

Comments Off on The CDM Clean Development Mechanism: is it effective? / 11 Dec 2013 por guidopreti
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