Understanding the Clean Development Mechanism

We attended the recent Carbon Forum Asia 2007, which has given us more knowledge about the carbon market and how carbon trading works. In particular, we realised that the Clean Development Mechanism (CDM) works and is useful in helping developing countries reduce their carbon emissions through the use of cleaner and better technology.

Background

Under the Kyoto Protocol, developed countries (Annex I countries) are required to reduce their greenhouse gas emissions below specific target levels, between 2008 and 2012. To give developed countries some flexibility in meeting their targets and for developing countries (non-Annex I countries) to benefit from investment and technology in carbon-reducing projects, the Protocol developed three flexibility mechanisms. They include:

1. Clean Development Mechanism (CDM): this mechanism provides for Annex I countries to implement projects that reduce emissions in non-Annex I countries, in return for certified emission reductions (CERs) that can help meet their emissions targets.
2. Joint Implementation (JI): this mechanism provides for an Annex I country to implement an emission-reducing project or a project that enhances removals by sinks in another Annex I country, and use the resulting emission reduction units (ERUs) to meet its own target.
3. Emissions Trading: this mechanism provides for Annex I countries to purchase units from other Annex I countries and use them to meet their targets.

Developed countries are required to take domestic actions (”significant element”) to reduce their own emissions and the use of the mechanisms should be “supplemental to domestic action”. In other words, carbon trading should not be used as a shortcut way to meet emissions targets.

Clean Development Mechanism (CDM) 

Currently, the CDM is the favoured mechanism to earn CERs or commonly known as carbon credits. These CERs are traded in the global carbon market with ready buyers and sellers. The CDM works and some speakers at the Carbon Forum called it a success story. A typical CDM project undergoes the following:

• The project developer undertakes a CDM project in a developing country (host country).
• The project must satisfy two criteria – additionality and sustainable development. Additionality means that the project must have reduced emissions in addition to those that would occur in the absence of the project. The project must also help the host country move towards sustainable development and this criteria is determined by the host country.
• The project developer describes the project details in the Project Design Document (PDD) based on approved methodology by the CDM Executive Board (EB).
• The host country appoints a Designated National Authority (DNA) to approve the CDM project.
• The PDD and approval from the DNA is submitted to a Designated Operational Entity (DOE) who is approved by the EB to conduct the validation of the proposed project.
• After validation, the DOE submits the PDD to the EB for approval and registration.
• After registration, the project developer implements the CDM project according to the PDD and monitors the emissions.
• The DOE verifies the emissions from the project and requests the EB to issue the CERs.

Most of the CDM projects deal with hydropower, biomass energy, renewable energy and energy efficiency. The UNFCCC CDM website reported that there are 844 registered projects and 53 requesting registration, and more than 2,600 projects in the pipeline. The expected average annual CERs from the registered projects amount to about 174,268,851. This means that the implementation of the CDM projects have reduced emissions in developing countries by about 174 million tonnes of carbon dioxide equivalent.

Source: UNFCCC CDM website.

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