Clean Development Mechanism (CDM) is an economic instrument for inducing initiatives to meet the challenges faced by the impending threat of climate change. It is a mechanism for promoting technology transfer and investment from developed countries to the developing countries for projects to reduce the emissions of Greenhouse Gases (GHGs). The mechanism allows the governments or private parties of developed countries to make investment for emission reduction projects in developing countries and, in turn, get the benefit in terms of “Certified Emission Reduction (CER)” which could be credited against their national emission reduction targets.
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History and Objectives of the Mechanism
The concept of CDM owes its origin to the Kyoto Protocol (1997) under the UN Framework Convention on Climate Change (UNFCCC) mooted at the United Nations Conference on Environment and Development (Earth Summit) in 1992. The Convention on Climate Change and the follow-up initiatives were prompted by the increasing evidence of global warming triggered by anthropogenic emissions of Greenhouse Gases (GHGs) which include Carbon Dioxide, Nitrous Oxide, Methane, Halogenated Hydrocarbon and Tropospheric Ozone. According to an assessment, doubling of carbon dioxide concentration in the atmosphere or an equivalent increase of a mixture of greenhouse gases can cause 1.5 to 4.5oC rise in global temperature with associated impacts such as sea level rise, Floods and droughts.
Purpose
The purpose of the CDM is to promote clean development in developing countries, i.e., the "nonAnnex I" countries (countries that aren't listed in Annex I of the Framework Convention). The CDM is one of the Protocol's "project-based" mechanisms in that the CDM is designed to promote projects that reduce emissions. The CDM is based on the idea of emission reduction "production". These reductions are "produced" and then subtracted against a hypothetical "baseline" of emissions. The emissions baseline are the emissions that are predicted to occur in the absence of a particular CDM project. CDM projects are "credited" against this baseline, in the sense that developing countries gain credit for producing these emission cuts. The CDM is one of the "flexibility mechanisms" that is defined in the Kyoto Protocol. The flexibility mechanisms are designed to allow Annex B countries to meet their emission reduction commitments with reduced impact on their economies (IPCC, 2007).The flexibility mechanisms were introduced to the Kyoto Protocol by the US government.
Prerequisites
For participation in CDM, all countries are required to meet the following prerequisites:
- Ratification of the Kyoto Protocol;
- Establishment of a National CDM Authority; and
- Willingness for voluntary participation in CDM.
Requirements
In addition to the aforesaid pre-requisites, the developed countries should also comply with the following requirements as stipulated in the Protocol:
- National System for the estimation of GHG emissions;
- National registry and annual inventory;
- Accounting system for sale and purchase of emission reductions; and
- Establishment of assigned amount as per emission limitation and reduction
Commitment to reduce their overall GHG emission by at least 5 per cent below 1990 levels in the first commitment period of 2008-2012.
Eligibility Criteria
The eligibility criteria for the CDM projects include the following:
- The projects must be approved by all parties involved;
- The projects should promote sustainable development in host countries;
- The projects should result in real, measurable and long term benefits towards climate change mitigation; and
- The emission reduction should be additional to what would have otherwise occurred without the projects.
Institutional structure
The institutional structure created for implementation of CDM includes three new entities:
- Executive Board;
- Designated National Authority; and
- Designated Operational Entity.
Sequence of the CDM project cycle: actors and activities
|
Stage
Actors |
Activities |
|
|
1. |
Project Proponent |
Project design |
|
2. |
Host Country Designated National Authority (DNA) |
Project approval |
|
3. |
Designated Operational Entity |
Validation
of the project |
|
|
(DOE) |
design document |
|
4. |
CDM Executive Board (EB) |
Registration of the project |
|
5. |
Project Proponent |
Project Implementation and Monitoring |
|
6. |
Designated Operation Entity (DOE) |
Verification
andcertification of emission reduction from the project. |
|
7. |
CDM Executive Board (EB) |
Issuance of Certified Emission Reductions (CERs) |
The Clean Development Mechanism (CDM) Project Cycle
The Clean Development Mechanism of the Kyoto Protocol defines a series of steps necessary to develop certified emissions reductions (CERs):
1. Project Design
2. Project Validation
3. Host Country Approval
4. Registration with the CDM Executive Board
5. Implementation and Monitoring
6. Verification/Certification and Issuance of CERs
7. Sale of CERs
 |
| The Clean Development Mechanism (CDM) Project Cycle |
1. Project Design
The first step starts with a determination of whether the project concept would qualify as a CDM project, including screening against project criteria, estimating the magnitude of emissions reductions, and preparing a Project Design Document (PDD) to meet certain specifications. The PDD must address the following key issues:
- Establishing the "baseline" for the project, which represents the anthropogenic emissions that would occur in the absence of the proposed project activity? The current flaring of gas may be an important consideration in establishing this baseline.
- Demonstrating "additionality," which in essence is a demonstration that the proposed project is not "business as usual." While this criterion has proved to be controversial on some projects, a series of guidelines is now available for making the additionality demonstration. and there is precedent for landfill gas recovery projects of the type envisioned.
- A monitoring methodology that effectively addresses gas flow and composition.
It is also critical to provide a basis for legal ownership of the project activity, i.e. the rights to the gas generated at landfill or wastewater treatment plant.
2. Project Validation
Validation is the process by which the PDD is independently evaluated by a "designated operation entity" (DOE) against the requirements of the CDM. The DOE must be a third party, separate and apart from the project developer and preparer of the PDD. Information submitted to the DOE should include comments by the local stakeholders and a summary of how due account was taken of any such comments, as well as an analysis of any environmental impact of the project's activity.
Based on its review, the DOE issues a validation report and opinion as to the adequacy of the PDD. The project developer/PDD consultant must respond to queries and comments to the satisfaction of the DOE for the final validation report to be issued.
3. Host Country Approval
Upon validation of the proposed project by the DOE, the following documentation must be submitted to the designated national authority (DNA) for host country approval:
1. The validation report.
2. The PDD, including a description of how the project will contribute to sustainable development.
3. If required by local law, an approved environmental impact assessment.
4. A written commitment to deliver an annual report on the results of monitoring, certification, and issuance of CERs.
Once the DNA requirements have been satisfied, a Letter of Approval is issued for the project.
4. Registration with the CDM Executive Board
Following the issuance of the Letter of Approval, a request for registration is submitted to the CDM Executive Board in the form of the validation report, including the PDD, the written approval of the DNA and an explanation of how this takes into account any comments received. The CDM Executive Board reviews the proposal and may invite public comment or ask for additional information/details before rejecting or accepting the proposal, which becomes a public document once submitted to the CDM Executive Board. Registration is a formal acceptance by the CDM Executive Board of a validated project as a CDM project activity and is the official recognition of the project feasibility to generate CER.
5. Implementation and Monitoring
Once the project has been validated, detailed engineering activities can be undertaken in parallel with the CDM approval process. Typically, construction would not occur until after CDM Executive Board approval. Monitoring of emissions reductions, as specified in the PDD monitoring plan, would then be implemented. In order to calculate the emissions reductions, the emissions of the project activity have to be subtracted from the reference scenario or Baseline outlined in the PDD.
6. Verification/Certification and issuance of CERs
Verification is required by a DOE, separate and apart from the preparer of the PDD and the DOE responsible for project validation, in order to demonstrate that actual emissions reductions are consistent with the PDD. A certification report is required on an annual basis to quantify the actual emissions reductions achieved during that period. The second DOE conducts on-site inspections, reviews monitoring results, and provides a verification report to the CDM Executive Board. The certification constitutes a request to the CDM Executive Board for issuance of CERs equal to the verified amount of reductions from the project. This issuance should be considered final 15 days after the day of receipt of the request for issuance, unless issues are raised by the CDM Executive Board or other parties involved. The requisite amount of CERs is then deposited in the registry account of the project developer.
7. Sale of CERs
The process of negotiating the sale of the CERs can usually start as the PDD is being finalized. A Term Sheet spelling out the terms of the agreement is initially prepared and later used for drafting the so-called Emissions Reductions Purchase Agreement (ERPA). These agreements define the amount of CERs to be transferred, the purchase price, the time period of delivery, and other relevant conditions. ENVIRON is experienced in developing these agreements and working with the buyers in the emissions reductions marketplace, e.g., World Bank’s Prototype Carbon Fund, tenders by national governments, brokers, and private sector buyer.
Benefits and beneficiaries of the CDM
The CDM has the potential of multi-faceted benefits and multiple beneficiaries
Benefits
• Global reduction of greenhouse gases.
• Lesser cost of climate change mitigation.
• Additional benefits through reduction of other pollutants besides GHGs.
• Opening a market for carbon investment.
• Additional financial resources and alternative technologies.
• Initiatives for adaptation to climate change impacts.
• Focus on sustainable development.
• Scope for cooperation at various levels (national, sub-regional, Regional and global).
Beneficiaries
• Developed countries.
• Countries with economy in transition.
• Developing countries.
• Small inland countries.
• Public sector.
• Private sector.