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Clean Development Mechanism
Clean Development Mechanism K Millock, Paris School of Economics, CNRS, Paris, France ã 2013 Elsevier Inc. All rights reserved.
Glossary Annex B Gathers the 38 parties to the Kyoto Protocol that have agreed to quantified emission limitation and reduction commitments listed in Annex B of the Protocol (mainly developed countries and countries with economies in transition). Annex I Article 12 that defines the CDM refers to the industrialized countries in Annex I of the UNFCCC as ‘Annex I countries’ and the developing countries as ‘non-Annex I countries.’ Baseline The emissions scenario that would have occurred in the absence of the project.
Introduction: The Organization of the Clean Development Mechanism The Clean Development Mechanism (CDM) is one of three flexible mechanisms introduced in the Kyoto Protocol together with Joint Implementation (JI) (article 6), and emissions trading among parties with quantified emission limitation and reduction objectives (article 17). The CDM is defined in article 12 of the Kyoto Protocol. The mechanism allows a party with emission reduction commitments listed in Annex B of the Kyoto Protocol to implement abatement projects in a developing country and, upon verification, to receive certified emission reductions (CERs) for the abatement. The party obtaining the credits can use them to obtain compliance with its national or Kyoto Protocol emission reduction objectives. The rationale behind the CDM is that emission reductions should be undertaken where it costs the least, as greenhouse gas (GHG) emissions abatement is a global public good and the geographical location of emission reductions does not matter for the global stock of GHG. Although based on a sound economic rationale of efficiency, the important issues of responsibility in creating the climate-change problem and equity in the allocation of costs have clouded the CDM and its implementation, as discussed later. The objectives of the CDM are twofold, in fact: to assist Annex I parties in complying with their emission reduction objectives and to assist non-Annex I countries in achieving sustainable development and in contributing to the ultimate objective of the United Nations Framework Convention for Climate Change (UNFCCC). Article 12 imposes further conditions on the emission reductions obtained under the CDM. The emission reductions are to be obtained through voluntary agreement that benefits the non-Annex I country, and they should yield real long-term measurable benefits for GHG mitigation. Article 12 of the Kyoto Protocol further defines the important condition of additionality for CERs to be created under the CDM. According to this condition, CERs are created only for emission reductions that would not have occurred in the absence of the CDM project, what is currently called the
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CER A certified emission reduction is issued under the conditions of the CDM (article 12 of the Kyoto Protocol) and is equal to one metric ton of CO2 equivalent. COP/MOP Conference of the parties serving as meeting of the parties to the Kyoto Protocol. The conference of the parties to the UNFCCC meets annually, and the meeting of the parties to the Kyoto Protocol takes place in the same period to save time and to improve coordination between the convention and the Kyoto Protocol. Kyoto Protocol Adopted on 11 December 1997 and initially signed by 84 parties, the Kyoto Protocol currently has 192 parties (191 states and the EU).
baseline. The issue of baselines and their possible manipulation is another main issue of contention surrounding the CDM that is discussed further. Additionality can be interpreted as an acknowledgment of there being technical, institutional, or economic barriers that prevent the emission reductions from being realized if there were not the CDM project. In practice, additionality is most often defined as the project not being economically viable without the proceeds from the sales of the CERs that are generated from the project. This review focuses on the economic aspects of the CDM but it is important to have a clear picture of the actors concerned. CDM projects may be initiated by a non-Annex I country (unilateral CDM projects), by joint agreement between an Annex I and a non-Annex I country (bilateral CDM), or by bilateral agreement through a third-party facilitator, such as the World Bank Prototype Carbon Fund (PCF). The project description (the Project Design Document – PDD) has to be approved by the Designated National Authority (DNA) of the host country; it is the DNA that is responsible for controlling that the project contributes to sustainable development in the host country. Designated Operational Entities (DOEs) verify, monitor, and certify emission reductions from a CDM project. CERs are issued for either 7 years (renewable twice upon verification) or 10 years. For afforestation and reforestation (carbon sink) projects, the crediting period is 30 or 20 years, renewable twice. Specific CERs have been defined for sink projects: temporary CERs (tCERs) that expire at the end of the commitment period in which they are issued, and longterm CERs (lCERs) that expire at the end of the creditation period of the project. The Executive Board (EB) supervises the CDM under the authority of the Conference of the Parties (COP). In particular, the EB is in charge of the accreditation and verification of DOE, the specification of methodologies for the PDD, the registration of validated CDM projects, and, ultimately, the issuance of CERs. The provisions that made the CDM operational, including the texts detailing the remit of the EB, were introduced in the Marrakesh Accords at COP-7
http://dx.doi.org/10.1016/B978-0-12-375067-9.00127-3
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in 2001. Following intense debate over the role of land use, and land-use change and forestry in developing countries, only afforestation and reforestation projects were finally allowed in the CDM. Detailed operational rules for the EB were developed in December 2005, but the first CDM project was registered in December 2003 and the first CERs issued in 2005. The Kyoto Protocol came into force on 16 February 2005 and the CDM can be considered fully operational for the first commitment period of the Kyoto Protocol (2008–2012). An adaptation levy of 2% is levied on all CDM projects in order to finance the UNFCCC Adaptation Fund for non-Annex I countries. Set up to finance adaptation activities in the poorest most vulnerable countries, the developing countries that host CDM projects thus carry part of the burden of the CDM levy. As discussed in the section ‘The Distribution of CDM Projects According to Region and Type,’ the incidence of the CDM levy falls on developed countries and middle-income newly industrialized countries. The market for primary CERs is relatively small compared to the large secondary market (purchases of CERs by parties other than the original members in the CDM project) that has developed. The secondary market is driven mainly by demand from participants in the European Union Emissions Trading Scheme (EU-ETS). The rules of supplementarity limit the use of credits from the CDM and JI to maximum 50% of the efforts by an Annex I country to achieve its emission reduction commitment under the Kyoto Protocol. According to the World Bank, 2010 prices of pre-2013 CERs varied around 8–10 EUR/ton carbon dioxide (CO2) equivalent (around 80% of the price of allowances in the EU-ETS). In all, the CDM represented a 2.7 billion USD carbon offset market in 2010.
The Distribution of CDM Projects According to Region and Type Figure 1 shows the number of projects registered in the CDM pipeline according to region as of the UNEP Risoe Centre of 1 May 2011. By this date, the CDM pipeline had counted 6147 projects, of which 1034 had already issued CERs. The CDM pipeline shows projects with issued CERs, both projects that are registered and projects that are expecting to obtain validation (but not rejected projects). In total, the CDM pipeline is expected to yield CERs corresponding to 2.7 Gt by 2012 (as of May 2011). The UNEP Risoe Centre estimates a supply of 7.4 Gt of CO2 equivalent by 2020, but uncertainty surrounds the future of CDM after the first commitment period (post 2012). China hosts the largest share of CDM projects (almost 41%), followed by India (26%), the rest of Asia and Pacific (13%), the rest of Latin America (9%), and Brazil (almost 6%). Africa hosts only 2.6% of the projects in the CDM pipeline (Figure 1). The picture is slightly different in terms of the share of CERs expected from the projects in the CDM pipeline by 2012. China hosted several large-scale projects (in the chemical industry, notably) and thus represents an even bigger share in terms of CERs (54%), whereas the projects in India have been of smaller scale and represent 16% of expected CERs by 2012 (Figure 2). In terms of expected CERs in 2012, projects in
Europe and Central Asia, 1.01%
Africa, Middle-East, 2.62% 1.11%
Rest of Latin America, 9.18%
Brazil, 5.76%
India, 26.08% Rest of Asia and Pacific, 13.31%
China, 40.95%
Figure 1 Regional distribution of the number of projects in the CDM pipeline. Source: Author’s calculations based on the CDM Pipeline, UNEP Risoe Centre, accessed on 1 May 2011.
Europe and Central Asia, 1.49%
Africa, 3.67%
MiddleEast, 1.41% Rest of Latin America, 7.67%
Brazil, 6.05%
India, 16.12% Rest of Asia and Pacific, 9.53%
China, 54.06%
Figure 2 Regional distribution of expected CERs in 2012 from the CDM pipeline. Source: Author’s calculations based on the CDM Pipeline, UNEP Risoe Centre, accessed on 1 May 2011.
Brazil represent 6%, the rest of Latin America almost 8%, and Africa only 3.7%. The uneven geographical distribution of CDM projects has been criticized. Nevertheless, the main countries hosting CDM projects are also newly industrialized countries with high economic growth rates and thus high expected future energy
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demand. In terms of contribution toward the overall objectives of the UNFCCC, it thus seems a rather positive aspect. The concern is, though, that most of these projects – at least in the early years of the CDM – did not entail construction of low GHG energy supply infrastructure. Rather, they concerned the abatement of industrial GHG emissions (N2O, HFCs, and PFCs) as will be seen when comparing Figures 4 and 5. In terms of numbers of projects, though, renewable energy (including biomass energy and hydro) now represents 62% of the projects in the CDM pipeline (Figure 3). The other main types of projects are methane mitigation (methane avoidance, fugitive gas, and coal-bed methane) and energy efficiency improvements. Mitigation of N2O, HFCs, and PFCs represents <2% of the projects, and afforestation and reforestation activities account for around 1% of the projects so far.
Because of the different scales of the projects according to type, the distribution is very different in terms of CERs expected in 2012 (Figure 4). Renewable energy projects (including biomass energy) account for only about a third of the CERs expected by 2012. Mitigation of N2O, HFCs, and PFCs represents 26% of expected CERs, whereas methane mitigation projects account for 18% of expected CERs, the same share as energy efficiency improvement and fossil fuel switch together. Although the distribution of project types changes only slightly when limiting the sample to projects with actually issued CERs (not shown here), there have been large changes in the distribution of CERs. The dominance of mitigation of industrial GHG emissions in the early stages of the CDM explains why projects abating emissions of N2O, HFCs, and PFCs represent over two-third of the CERs issued so far (Figure 5). The criticism
Other 2%
Renewables (Wind, Solar, and Tidal) 24% Reforestation/ Afforestation 1% N2O 1%
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Cement 1% Coal bed/mine methane 1%
Biomass energy 12%
Energy efficiency 13% Fossil fuel switch 2%
Methane avoidance 11% Hydro 26% Landfill gas 5%
Fugitive 1% HFCs 0%
Figure 3 Distribution of the number of CDM projects in the pipeline according to type. Source: Author’s calculations based on the CDM Pipeline, UNEP Risoe Centre, accessed on 1 May 2011.
Other 2% Reforestation/ Afforestation 1%
Cement 1%
Biomass energy Renewables 6% (Wind, Solar, and
Coal bed/mine methane 5%
Tidal) 12%
N2O 9%
Energy efficiency 11%
Methane avoidance 4%
Fossil fuel switch 7% Landfill gas 7%
Hydro 16%
Fugitive 2% HFCs 17%
Figure 4 Distribution of CERs expected in 2012 from the CDM pipeline according to project type. Source: Author’s calculations based on the CDM Pipeline, UNEP Risoe Centre, accessed on 1 May 2011.
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Renewables (Wind, Solar, Tidal) 6% Reforestation/ Afforestation 0%
Biomass Cement Other energy 0% 0% 3% Energy efficiency 5%
Coal bed/mine methane 1%
Fossil fuel switch 2% Fugitive 1%
N2O 24%
Methane avoidance 1% Landfill gas 2%
HFCs 48%
Hydro 7%
Figure 5 Distribution of issued CERs according to project type (as of 1 May 2011). Source: Author’s calculations based on the CDM Pipeline, UNEP Risoe Centre, accessed on 1 May 2011.
of the distribution of CDM projects according to mitigation area is easily understood, as renewable energy projects account for only 16% of issued CERs and energy efficiency improvements for 5% of issued CERs. A comparison of Figures 5 and 4 shows the changes in the type of CDM projects over the years. New rules have been imposed by the EB on the types of projects permitted in the CDM and there has been a significant increase not only in hydro-energy projects, above all, but also in projects introducing renewable energy and, albeit to a smaller extent, improvements in energy efficiency. Afforestation and reforestation activities still account for only 1% of the CERs.
The CDM: Debated Issues The CDM has been much debated since its inception. The concerns include the low-hanging fruit argument, high transaction costs from a project-based mechanism, the integrity of the mechanism when there are difficulties in monitoring and verifying emission reductions, leakage, and, above all, concerns about its actual contribution to sustainable development, including the diffusion of low GHG emission technologies.
The Low-Hanging Fruit Argument One of the first concerns raised about the CDM was that Annex I countries would pick ‘low-hanging fruit,’ that is, implement the cheapest abatement options and preclude the host country’s using these low-cost options at a future date when or if it decided to commit to quantitative reduction objectives.
From an economic perspective, it is indeed efficient to implement the cheapest abatement projects first. The issue is more adequately framed as a situation where the host country gives up an option to use an abatement project in the future. Formal modeling of the issue shows that it is in the (developing) host country’s interest to let Annex I countries implement the lowcost options under the CDM as long as the host country receives adequate compensation for transferring the CERs to the investing party. The compensation that is needed to leave the host country as well off as it would be when keeping the option to use the low-cost project in the future depends on the discount rates of the investor and the host country, the evolution of the market price for emission reductions, and the extent to which future allocations of permits would be affected by emission reductions implemented through the CDM. The consensus on the issue is thus that the problem only arises absent adequate compensation for the CER transfer.
Transaction Costs Transaction costs are normally defined as search costs, negotiation costs, and costs incurred from having a CDM project approved, including costs of monitoring, validation, registration, and enforcement of the contract. At the outset of the CDM, it was argued that project-based mechanisms, such as the CDM and JI, would have higher transaction costs than an efficient emissions market. Indeed, in a project-based mechanism, appropriate baselines have to be constructed for each project. Assessments of the pilot phase initiated by the UNFCCC in 1995 – Activities Implemented Jointly (AIJ) – indicated that transaction costs vary
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between 1 and 30% of total project costs, but that there are economies of scale and the larger the project, the lower the transaction costs. Over time, transaction costs may also decrease as actors in the CDM streamline baseline construction and other steps of the validation process. One example is the simplified modalities and procedures for small-scale projects that have been developed for projects on renewable energy and energy efficiency improvement. Funds such as the World Bank’s PCF and its followers constitute another means to minimize transaction costs. One of the major emission markets in a GHG, the EU-ETS, also entails transaction costs, notably the costs of elaborating the national allocation plans and the lobbying costs prior to adoption of the plans. Such allocation plans are set, however, on less frequent occasions than the project baselines required for each separate CDM project. Estimates from different emission markets indicate that they may reach as high as 20 or 30%, at least for small participants. Similarly to the findings on CDM projects, transaction costs have been estimated to be at the higher end for small companies, and much less for large firms. More empirical work measuring transaction costs in different market mechanisms is still needed, and until there is more empirical assessment of the issue, the jury is still out on the relative size of the transaction costs of the CDM compared to other Kyoto mechanisms. A rather noncontroversial conclusion is that transaction costs for small projects are higher in the CDM than in an emission trading system.
Incentives Problems Under the CDM Since its start, the central problem of the CDM has been monitoring and verification. The credibility of the mechanism is indeed clearly related to the fulfillment of the conditions stated in article 12 of the Kyoto Protocol, above all that the CERs represent real, long-term additional reductions to the emissions without the project, the so-called baseline. The baseline, that needs to be included in each PDD, thus represents an emissions scenario without the project, and any emission reductions need to be additional to the baseline in order to be validated as CERs. The CDM suffers from a problem of asymmetric information, as the host country or host partner has private information on the costs and quantity of emission reductions. No partner has incentives to verify the actual emission reduction: the buyer is satisfied as long as there are CERs, and the seller has no emission ceiling and so, does not need to worry about flaws in the accounting method. The EB has delegated verification and validation of CERs to DOEs. The problem in the current procedure is that the operators (DOEs) that check the appropriateness of the project with respect to the required criteria of a CDM project (notably additionality) are hired and paid for by the partners that negotiate the transaction. This is an example of a classical principal–agent problem where the principal lacks full information and the agent may not share his or her private information in order to maximize his or her private benefits. The problem may occur at two levels, between the DOE and the EB, and between the parties in the project and the DOE. This kind of gaming incentives does not only exist on the level of the firms participating in the project. A wider concern has been that host countries may delay appropriate policies to take
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action against GHG emissions, or may take into account the effect on the baseline of any economy-wide environmental policy. The actual baseline is indeed unverifiable (as true preferences for GHG mitigation cannot be known) and it has been difficult to establish exogenous baselines. These concerns led the EB to adopt rules such as the one that allows the DOE to ignore any policies favoring low-emission technology enacted before 2001 when establishing the baseline.
Effects on Leakage Leakage is defined as the net change of anthropogenic emissions by sources of GHG emissions which occur outside of the CDM project boundaries (in other sectors, regions, or countries), and which are measurable and attributable to the CDM project activity. CDM projects may also lead to environmental externalities in other domains, such as water, biodiversity, or local air pollution. Here, the narrow definition is used of increases in GHG emissions elsewhere resulting from demand and supply changes in production factors that change relative factor prices and, in particular, the energy price. A small CDM project would normally be assumed not to have any impact on market prices. Nevertheless, when aggregated, the CDM may have important impacts on leakage. Climate-change research has estimated the extent of carbon leakage to an order of 5–20%. Only recent work is doing more specific assessment of carbon leakage linked with the CDM. The Marrakesh Accords stipulate specifically that the PDD should contain a quantification of CDM project leakage, but there has been little progress on reporting standards. In general, leakage is seen as a phenomenon of the pollution haven hypothesis: if stricter environmental regulation increases the relative shadow cost of GHG emissions in one country or region, then the production generating those emissions may move away from the country or region. On the one hand, one may thus argue that the CDM should decrease leakage, as it reduces the shadow cost differential between Annex I and non-Annex I countries. On the other hand, a CDM project may change input factor prices and energy output prices, in particular reduce the local energy price, which could yield an increase in local energy demand high enough to outweigh the reduction in carbon emissions intensity brought about by projects investing in CO2 reduction. This is similar to a scale effect that outbalances the technical efficiency effect sought after with the CDM when it concerns energy supply or demand investments. The most recent work on the topic thus tries to quantify these opposing effects to assess the overall leakage that can be attributed to the CDM.
Contribution to Sustainable Development The contribution to sustainable development of the CDM may be appraised on several dimensions: environmental (e.g., the impact on the local environment), social (e.g., the share of the project’s net benefits that are recuperated by the poor, the project’s contribution to human and social development), and economic (e.g., the project’s impact on local employment and the regional economy). The emission reductions funded through the CDM are unevenly distributed across regions and countries: as seen in
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Figure 2, China and India represent the largest share of CERs and only a very small percentage of projects are implemented in Africa (Figures 1 and 2). Concerns of the actual contribution of CDM to sustainability have arisen because of the type of projects as well and the local distribution of their benefits. The large part of GHG emission reductions undertaken in the chemical industry can be claimed to have had little impact, if any at all, on sustainability in the host countries. The distribution of benefits from local projects is often considered unequal. There are now several analyses that are trying to assess the sustainability contribution of CDM projects in a rigorous manner. Some criticize the impact on the local environment; in some cases, there are trade-offs between local health benefits and the global public good of GHG mitigation. Others find a low priority on improving access to energy sources among the poorest in local society. The origins of the CDM were based on the argument that constructing new clean energy sources in developing countries would be of lower cost than retrofitting energy plants in developing countries. In the first years of the CDM, few energy efficiency or renewable energy projects were developed though. In order to improve on the distribution of project types, the EB has developed simplified baseline accounting procedures for small-scale projects on renewable energy with a maximum output capacity equivalent to 15 MW and energy efficiency improvement projects that reduce energy consumption by up to the equivalent of 60 GWh year1. Forest management and conservation was excluded from the CDM for the first commitment period (2008–2012). The new mechanism ‘Reducing Emissions from Deforestation and Degradation’ (REDD þ), separate from the CDM, may provide a means to target, more explicitly, this GHG mitigation potential and do so in a manner that will benefit the rural poor.
Technology Transfers The CDM has also been evaluated on its capacity to improve transfer of technology that helps mitigate GHG emissions. Although the CDM does not have any explicit objective of technology transfer, the UNFCCC explicitly mentions that parties should cooperate in the diffusion, adoption, and transfer of environmentally friendly technologies as a means to achieve the overall objective of stabilizing anthropogenic climate change. Any assessment of the CDM on this issue has to compare it to alternative policies, in particular a cap and trade scheme. The comparison will then depend on the access to the permit market, the competitiveness of output markets as well as the character of the investment concerned. Our understanding of the differences in technology diffusion between flexible mechanisms is still at the initial stage, and recent theoretical advances will shed more light on the issue. The empirical evidence, on the contrary, shows that technology transfers have taken place in at least 30% of the CDM projects, and possibly even half of them, but that it depends to a great extent on the host country and the type of project. The countries that have hosted the most projects with technology transfers included are Mexico, Malaysia, Brazil, China, and India. Since China and India tend to implement unilateral projects, technology transfer has been more limited in those countries compared to similar projects in the other main host countries of the CDM. On one hand, existing national technological capacities
increase the likelihood of technology transfer; on the other hand, the larger the cumulative stock of projects of the same type in the host country, the less likely is a technology transfer. The likelihood of technology transfers depends very much on the type of project; for example, projects involving the mitigation of non-CO2 GHG emissions more often included technology transfers than others. It is not straightforward to measure technology transfers, though, as the term may be included in the PDD, but details on the exact nature of the knowledge or equipment transferred and whether it was previously available in the host country or not may be lacking. Most studies still tend to conclude that technology transfers are more likely: the larger the project, the stronger are the bilateral ties between the parties – in the form of existing foreign direct investments (FDIs) or trade links – and the better is the business climate and governance of the host country. Transfers have also been found to depend significantly on whether the host party was a subsidiary to a company in a developed country. It is thus not clear whether the CDM has advanced technology transfer to a further extent than that which would occur through FDI or existing bilateral trade relations. COP-16 in Cancun decided to establish a Technology Mechanism to further enhance the diffusion of GHG mitigation technology.
Conclusion: The Role of the CDM Post Kyoto Many of the problems with the CDM stem from the fact that the transfers of emission reductions occur between parties with uneven standing, that is, parties with quantified emission reduction commitments and parties without any quantitative obligation of emission reduction. In an exchange of Allocated Amounts Units between parties with quantified objectives defined in Annex B of the Kyoto Protocol, both parties are liable should the emission ceiling be exceeded, whereas in the CDM the host country has no binding emission limit. Several observers thus consider the CDM as a transition phase, following which upper-middle-income economies would proceed to take on quantified emission reduction commitments. Concerns about the CDM are also based on arguments of the inefficiency of a project-based mechanism versus an emissions market and the high administrative costs that are obstacles to the diffusion of CDM projects outside of some major host countries. In equity terms, the mechanism has been challenged for the low share of projects and CERs from low-income countries. Although not an explicit objective of the CDM, technology transfer is included in the UNFCCC and the CDM has been evaluated on its role of furthering technology transfer between Annex I countries and non-Annex I countries. Here too, technology transfers seem to occur only to a limited extent, notably in large projects and projects based on existing bilateral ties such as existing trade or FDI relations. Reform proposals for the CDM include further streamlining and simplification of the registration and validation process not just to minimize transaction costs – in particular for small-scale projects – but also because it is now clear that the mechanism needs to be reconsidered in a more fundamental manner. The changes that are the most discussed for a future CDM are policy and sectoral CDM, to substitute for the CDM’s current project basis. The idea is that countries pool
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several projects and measures in one sector into one CDM sectoral program and obtain CERs for emission reductions obtained from a predefined baseline for the sector. The advantage of sectoral CDM is that the GHG mitigation potential can be tapped in entire sectors such as residential energy efficiency, or transportation, where the CDM has not made inroads so far (see the distribution of CERs according to the type of project in the section ‘The Distribution of CDM Projects According to Region and Type’). Programmatic CDM already exists in the CDM rulebook and could be a basis for further development of policy-based CDM for entire sectors. A potential problem with this approach is that it does nothing to solve the incentives to manipulate host country baselines. Rather, it may amplify them by delaying projects or national policies that otherwise would otherwise have been implemented. Others favor a sectoral regional approach, in particular, to avoid potential carbon leakage. Here, CERs would stem from projects regrouped on an industry sector basis. The advantage of this approach is that it would strive toward the goal of each industry facing the same price per GHG emission regardless of its location. Despite the uncertainty about the future of the CDM, it has enabled a nonnegligible total sum of emission reductions. Some of these emission reductions may have come at a higher cost than necessary (recall the debate surrounding the initially high part of HFC and PFC reduction), but to a large extent the CDM has brought forward low-cost mitigation options that help in achieving the emission reduction commitments of Annex I countries. Most debaters agree that the CDM has been less successful when it comes to its other main goal, achieving sustainable development in non-Annex I countries. Part of this failure may result from weak definitions and verification of sustainability, by DNAs that do not necessarily have the correct incentives to genuinely implement such change from a political economy perspective. The EB has attempted to solve this by excluding or restricting certain types of projects from the CDM, but the distribution of projects could still be improved, both in terms of the kind of projects and their geographical location. The main success of the CDM thus has to be its pivotal role in keeping certain key developing countries interested in staying in the Kyoto Protocol framework. A critical review of the narrow geographical distribution of CDM projects concentrated in four major newly industrialized countries has to note that they are the
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countries with the highest economic growth rates and, thus, the countries that should be key participants in a future climate treaty.
See also: Climate Change and Policy: Carbon Offsets; Economics of Forest Carbon Sequestration as a Climate Change Mitigation Strategy; Markets/Technology Innovation/Adoption/Diffusion: Technological Change and Climate Change Policy; Media: Biological: Reducing Emissions from Deforestation and Forest Degradation.
Further Reading Dechezlepreˆtre A, Glachant M, and Me´nie`re Y (2008) The clean development mechanism and the international diffusion of technologies: An empirical study. Energy Policy 36: 1273–1283. Figueres C and Streck C (2009) A post-2012 vision for the clean development mechanism. (Chapter 26) In: Freestone D and Streck C (eds.) Legal Aspects of Carbon Trading: Kyoto, Copenhagen and Beyond, pp. 562–582. New York: Oxford University Press. Hagem C (2009) The clean development mechanism versus international permit trading: The effect on technological change. Resource and Energy Economics 31(1): 1–12. Kallbekken S (2007) Why the CDM will reduce carbon leakage. Climate Policy 7(3): 197–211. Lecocq F and Ambrosi P (2007) The clean development mechanism: History, status and prospects. Review of Environmental Economics and Policy 1(1): 134–151. Narain U and van’t Veld K (2008) The clean development mechanism’s low-hanging fruit problem: When it might arise and how it might be solved? Environmental and Resource Economics 40(3): 445–465. Olsen KH (2007) The clean development’s mechanism’s contribution to sustainable development: A review of the literature. Climate Change 84: 59–73. Rose A, Bulte E, and Folmer H (1999) Long-run implications for developing countries of joint implementation of greenhouse gas mitigation. Environmental and Resource Economics 14(1): 19–31. Seres S, Haites E, and Murphy K (2010) The contribution of the clean development mechanism under the kyoto protocol to technology transfer. UNFCCC Report. Vo¨hringer F, Kuosmanen T, and Dellink R (2006) How to attribute market leakage to CDM projects. Climate Policy 5: 503–516. Wara M (2007) Is the global carbon market working? Nature 445: 595–596. World Bank (2011) State and Trends of the Carbon Market 2011. Washington, DC: World Bank.
Relevant Websites http://cdmpipeline.org – The UNEP Risoe CDM/JI Pipeline Analysis and Database. http://cdm.unfccc.int/index.html – The UNFCCC CDM website.
Glossary Annex B Gathers the 38 parties to the Kyoto Protocol that have agreed to quantified emission limitation and reduction commitments listed in Annex B of the Protocol (mainly developed countries and countries with economies in transition). Annex I Article 12 that defines the CDM refers to the industrialized countries in Annex I of the UNFCCC as ‘Annex I countries’ and the developing countries as ‘non-Annex I countries.’ Baseline The emissions scenario that would have occurred in the absence of the project.
Introduction: The Organization of the Clean Development Mechanism The Clean Development Mechanism (CDM) is one of three flexible mechanisms introduced in the Kyoto Protocol together with Joint Implementation (JI) (article 6), and emissions trading among parties with quantified emission limitation and reduction objectives (article 17). The CDM is defined in article 12 of the Kyoto Protocol. The mechanism allows a party with emission reduction commitments listed in Annex B of the Kyoto Protocol to implement abatement projects in a developing country and, upon verification, to receive certified emission reductions (CERs) for the abatement. The party obtaining the credits can use them to obtain compliance with its national or Kyoto Protocol emission reduction objectives. The rationale behind the CDM is that emission reductions should be undertaken where it costs the least, as greenhouse gas (GHG) emissions abatement is a global public good and the geographical location of emission reductions does not matter for the global stock of GHG. Although based on a sound economic rationale of efficiency, the important issues of responsibility in creating the climate-change problem and equity in the allocation of costs have clouded the CDM and its implementation, as discussed later. The objectives of the CDM are twofold, in fact: to assist Annex I parties in complying with their emission reduction objectives and to assist non-Annex I countries in achieving sustainable development and in contributing to the ultimate objective of the United Nations Framework Convention for Climate Change (UNFCCC). Article 12 imposes further conditions on the emission reductions obtained under the CDM. The emission reductions are to be obtained through voluntary agreement that benefits the non-Annex I country, and they should yield real long-term measurable benefits for GHG mitigation. Article 12 of the Kyoto Protocol further defines the important condition of additionality for CERs to be created under the CDM. According to this condition, CERs are created only for emission reductions that would not have occurred in the absence of the CDM project, what is currently called the
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CER A certified emission reduction is issued under the conditions of the CDM (article 12 of the Kyoto Protocol) and is equal to one metric ton of CO2 equivalent. COP/MOP Conference of the parties serving as meeting of the parties to the Kyoto Protocol. The conference of the parties to the UNFCCC meets annually, and the meeting of the parties to the Kyoto Protocol takes place in the same period to save time and to improve coordination between the convention and the Kyoto Protocol. Kyoto Protocol Adopted on 11 December 1997 and initially signed by 84 parties, the Kyoto Protocol currently has 192 parties (191 states and the EU).
baseline. The issue of baselines and their possible manipulation is another main issue of contention surrounding the CDM that is discussed further. Additionality can be interpreted as an acknowledgment of there being technical, institutional, or economic barriers that prevent the emission reductions from being realized if there were not the CDM project. In practice, additionality is most often defined as the project not being economically viable without the proceeds from the sales of the CERs that are generated from the project. This review focuses on the economic aspects of the CDM but it is important to have a clear picture of the actors concerned. CDM projects may be initiated by a non-Annex I country (unilateral CDM projects), by joint agreement between an Annex I and a non-Annex I country (bilateral CDM), or by bilateral agreement through a third-party facilitator, such as the World Bank Prototype Carbon Fund (PCF). The project description (the Project Design Document – PDD) has to be approved by the Designated National Authority (DNA) of the host country; it is the DNA that is responsible for controlling that the project contributes to sustainable development in the host country. Designated Operational Entities (DOEs) verify, monitor, and certify emission reductions from a CDM project. CERs are issued for either 7 years (renewable twice upon verification) or 10 years. For afforestation and reforestation (carbon sink) projects, the crediting period is 30 or 20 years, renewable twice. Specific CERs have been defined for sink projects: temporary CERs (tCERs) that expire at the end of the commitment period in which they are issued, and longterm CERs (lCERs) that expire at the end of the creditation period of the project. The Executive Board (EB) supervises the CDM under the authority of the Conference of the Parties (COP). In particular, the EB is in charge of the accreditation and verification of DOE, the specification of methodologies for the PDD, the registration of validated CDM projects, and, ultimately, the issuance of CERs. The provisions that made the CDM operational, including the texts detailing the remit of the EB, were introduced in the Marrakesh Accords at COP-7
http://dx.doi.org/10.1016/B978-0-12-375067-9.00127-3
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in 2001. Following intense debate over the role of land use, and land-use change and forestry in developing countries, only afforestation and reforestation projects were finally allowed in the CDM. Detailed operational rules for the EB were developed in December 2005, but the first CDM project was registered in December 2003 and the first CERs issued in 2005. The Kyoto Protocol came into force on 16 February 2005 and the CDM can be considered fully operational for the first commitment period of the Kyoto Protocol (2008–2012). An adaptation levy of 2% is levied on all CDM projects in order to finance the UNFCCC Adaptation Fund for non-Annex I countries. Set up to finance adaptation activities in the poorest most vulnerable countries, the developing countries that host CDM projects thus carry part of the burden of the CDM levy. As discussed in the section ‘The Distribution of CDM Projects According to Region and Type,’ the incidence of the CDM levy falls on developed countries and middle-income newly industrialized countries. The market for primary CERs is relatively small compared to the large secondary market (purchases of CERs by parties other than the original members in the CDM project) that has developed. The secondary market is driven mainly by demand from participants in the European Union Emissions Trading Scheme (EU-ETS). The rules of supplementarity limit the use of credits from the CDM and JI to maximum 50% of the efforts by an Annex I country to achieve its emission reduction commitment under the Kyoto Protocol. According to the World Bank, 2010 prices of pre-2013 CERs varied around 8–10 EUR/ton carbon dioxide (CO2) equivalent (around 80% of the price of allowances in the EU-ETS). In all, the CDM represented a 2.7 billion USD carbon offset market in 2010.
The Distribution of CDM Projects According to Region and Type Figure 1 shows the number of projects registered in the CDM pipeline according to region as of the UNEP Risoe Centre of 1 May 2011. By this date, the CDM pipeline had counted 6147 projects, of which 1034 had already issued CERs. The CDM pipeline shows projects with issued CERs, both projects that are registered and projects that are expecting to obtain validation (but not rejected projects). In total, the CDM pipeline is expected to yield CERs corresponding to 2.7 Gt by 2012 (as of May 2011). The UNEP Risoe Centre estimates a supply of 7.4 Gt of CO2 equivalent by 2020, but uncertainty surrounds the future of CDM after the first commitment period (post 2012). China hosts the largest share of CDM projects (almost 41%), followed by India (26%), the rest of Asia and Pacific (13%), the rest of Latin America (9%), and Brazil (almost 6%). Africa hosts only 2.6% of the projects in the CDM pipeline (Figure 1). The picture is slightly different in terms of the share of CERs expected from the projects in the CDM pipeline by 2012. China hosted several large-scale projects (in the chemical industry, notably) and thus represents an even bigger share in terms of CERs (54%), whereas the projects in India have been of smaller scale and represent 16% of expected CERs by 2012 (Figure 2). In terms of expected CERs in 2012, projects in
Europe and Central Asia, 1.01%
Africa, Middle-East, 2.62% 1.11%
Rest of Latin America, 9.18%
Brazil, 5.76%
India, 26.08% Rest of Asia and Pacific, 13.31%
China, 40.95%
Figure 1 Regional distribution of the number of projects in the CDM pipeline. Source: Author’s calculations based on the CDM Pipeline, UNEP Risoe Centre, accessed on 1 May 2011.
Europe and Central Asia, 1.49%
Africa, 3.67%
MiddleEast, 1.41% Rest of Latin America, 7.67%
Brazil, 6.05%
India, 16.12% Rest of Asia and Pacific, 9.53%
China, 54.06%
Figure 2 Regional distribution of expected CERs in 2012 from the CDM pipeline. Source: Author’s calculations based on the CDM Pipeline, UNEP Risoe Centre, accessed on 1 May 2011.
Brazil represent 6%, the rest of Latin America almost 8%, and Africa only 3.7%. The uneven geographical distribution of CDM projects has been criticized. Nevertheless, the main countries hosting CDM projects are also newly industrialized countries with high economic growth rates and thus high expected future energy
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demand. In terms of contribution toward the overall objectives of the UNFCCC, it thus seems a rather positive aspect. The concern is, though, that most of these projects – at least in the early years of the CDM – did not entail construction of low GHG energy supply infrastructure. Rather, they concerned the abatement of industrial GHG emissions (N2O, HFCs, and PFCs) as will be seen when comparing Figures 4 and 5. In terms of numbers of projects, though, renewable energy (including biomass energy and hydro) now represents 62% of the projects in the CDM pipeline (Figure 3). The other main types of projects are methane mitigation (methane avoidance, fugitive gas, and coal-bed methane) and energy efficiency improvements. Mitigation of N2O, HFCs, and PFCs represents <2% of the projects, and afforestation and reforestation activities account for around 1% of the projects so far.
Because of the different scales of the projects according to type, the distribution is very different in terms of CERs expected in 2012 (Figure 4). Renewable energy projects (including biomass energy) account for only about a third of the CERs expected by 2012. Mitigation of N2O, HFCs, and PFCs represents 26% of expected CERs, whereas methane mitigation projects account for 18% of expected CERs, the same share as energy efficiency improvement and fossil fuel switch together. Although the distribution of project types changes only slightly when limiting the sample to projects with actually issued CERs (not shown here), there have been large changes in the distribution of CERs. The dominance of mitigation of industrial GHG emissions in the early stages of the CDM explains why projects abating emissions of N2O, HFCs, and PFCs represent over two-third of the CERs issued so far (Figure 5). The criticism
Other 2%
Renewables (Wind, Solar, and Tidal) 24% Reforestation/ Afforestation 1% N2O 1%
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Cement 1% Coal bed/mine methane 1%
Biomass energy 12%
Energy efficiency 13% Fossil fuel switch 2%
Methane avoidance 11% Hydro 26% Landfill gas 5%
Fugitive 1% HFCs 0%
Figure 3 Distribution of the number of CDM projects in the pipeline according to type. Source: Author’s calculations based on the CDM Pipeline, UNEP Risoe Centre, accessed on 1 May 2011.
Other 2% Reforestation/ Afforestation 1%
Cement 1%
Biomass energy Renewables 6% (Wind, Solar, and
Coal bed/mine methane 5%
Tidal) 12%
N2O 9%
Energy efficiency 11%
Methane avoidance 4%
Fossil fuel switch 7% Landfill gas 7%
Hydro 16%
Fugitive 2% HFCs 17%
Figure 4 Distribution of CERs expected in 2012 from the CDM pipeline according to project type. Source: Author’s calculations based on the CDM Pipeline, UNEP Risoe Centre, accessed on 1 May 2011.
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Renewables (Wind, Solar, Tidal) 6% Reforestation/ Afforestation 0%
Biomass Cement Other energy 0% 0% 3% Energy efficiency 5%
Coal bed/mine methane 1%
Fossil fuel switch 2% Fugitive 1%
N2O 24%
Methane avoidance 1% Landfill gas 2%
HFCs 48%
Hydro 7%
Figure 5 Distribution of issued CERs according to project type (as of 1 May 2011). Source: Author’s calculations based on the CDM Pipeline, UNEP Risoe Centre, accessed on 1 May 2011.
of the distribution of CDM projects according to mitigation area is easily understood, as renewable energy projects account for only 16% of issued CERs and energy efficiency improvements for 5% of issued CERs. A comparison of Figures 5 and 4 shows the changes in the type of CDM projects over the years. New rules have been imposed by the EB on the types of projects permitted in the CDM and there has been a significant increase not only in hydro-energy projects, above all, but also in projects introducing renewable energy and, albeit to a smaller extent, improvements in energy efficiency. Afforestation and reforestation activities still account for only 1% of the CERs.
The CDM: Debated Issues The CDM has been much debated since its inception. The concerns include the low-hanging fruit argument, high transaction costs from a project-based mechanism, the integrity of the mechanism when there are difficulties in monitoring and verifying emission reductions, leakage, and, above all, concerns about its actual contribution to sustainable development, including the diffusion of low GHG emission technologies.
The Low-Hanging Fruit Argument One of the first concerns raised about the CDM was that Annex I countries would pick ‘low-hanging fruit,’ that is, implement the cheapest abatement options and preclude the host country’s using these low-cost options at a future date when or if it decided to commit to quantitative reduction objectives.
From an economic perspective, it is indeed efficient to implement the cheapest abatement projects first. The issue is more adequately framed as a situation where the host country gives up an option to use an abatement project in the future. Formal modeling of the issue shows that it is in the (developing) host country’s interest to let Annex I countries implement the lowcost options under the CDM as long as the host country receives adequate compensation for transferring the CERs to the investing party. The compensation that is needed to leave the host country as well off as it would be when keeping the option to use the low-cost project in the future depends on the discount rates of the investor and the host country, the evolution of the market price for emission reductions, and the extent to which future allocations of permits would be affected by emission reductions implemented through the CDM. The consensus on the issue is thus that the problem only arises absent adequate compensation for the CER transfer.
Transaction Costs Transaction costs are normally defined as search costs, negotiation costs, and costs incurred from having a CDM project approved, including costs of monitoring, validation, registration, and enforcement of the contract. At the outset of the CDM, it was argued that project-based mechanisms, such as the CDM and JI, would have higher transaction costs than an efficient emissions market. Indeed, in a project-based mechanism, appropriate baselines have to be constructed for each project. Assessments of the pilot phase initiated by the UNFCCC in 1995 – Activities Implemented Jointly (AIJ) – indicated that transaction costs vary
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between 1 and 30% of total project costs, but that there are economies of scale and the larger the project, the lower the transaction costs. Over time, transaction costs may also decrease as actors in the CDM streamline baseline construction and other steps of the validation process. One example is the simplified modalities and procedures for small-scale projects that have been developed for projects on renewable energy and energy efficiency improvement. Funds such as the World Bank’s PCF and its followers constitute another means to minimize transaction costs. One of the major emission markets in a GHG, the EU-ETS, also entails transaction costs, notably the costs of elaborating the national allocation plans and the lobbying costs prior to adoption of the plans. Such allocation plans are set, however, on less frequent occasions than the project baselines required for each separate CDM project. Estimates from different emission markets indicate that they may reach as high as 20 or 30%, at least for small participants. Similarly to the findings on CDM projects, transaction costs have been estimated to be at the higher end for small companies, and much less for large firms. More empirical work measuring transaction costs in different market mechanisms is still needed, and until there is more empirical assessment of the issue, the jury is still out on the relative size of the transaction costs of the CDM compared to other Kyoto mechanisms. A rather noncontroversial conclusion is that transaction costs for small projects are higher in the CDM than in an emission trading system.
Incentives Problems Under the CDM Since its start, the central problem of the CDM has been monitoring and verification. The credibility of the mechanism is indeed clearly related to the fulfillment of the conditions stated in article 12 of the Kyoto Protocol, above all that the CERs represent real, long-term additional reductions to the emissions without the project, the so-called baseline. The baseline, that needs to be included in each PDD, thus represents an emissions scenario without the project, and any emission reductions need to be additional to the baseline in order to be validated as CERs. The CDM suffers from a problem of asymmetric information, as the host country or host partner has private information on the costs and quantity of emission reductions. No partner has incentives to verify the actual emission reduction: the buyer is satisfied as long as there are CERs, and the seller has no emission ceiling and so, does not need to worry about flaws in the accounting method. The EB has delegated verification and validation of CERs to DOEs. The problem in the current procedure is that the operators (DOEs) that check the appropriateness of the project with respect to the required criteria of a CDM project (notably additionality) are hired and paid for by the partners that negotiate the transaction. This is an example of a classical principal–agent problem where the principal lacks full information and the agent may not share his or her private information in order to maximize his or her private benefits. The problem may occur at two levels, between the DOE and the EB, and between the parties in the project and the DOE. This kind of gaming incentives does not only exist on the level of the firms participating in the project. A wider concern has been that host countries may delay appropriate policies to take
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action against GHG emissions, or may take into account the effect on the baseline of any economy-wide environmental policy. The actual baseline is indeed unverifiable (as true preferences for GHG mitigation cannot be known) and it has been difficult to establish exogenous baselines. These concerns led the EB to adopt rules such as the one that allows the DOE to ignore any policies favoring low-emission technology enacted before 2001 when establishing the baseline.
Effects on Leakage Leakage is defined as the net change of anthropogenic emissions by sources of GHG emissions which occur outside of the CDM project boundaries (in other sectors, regions, or countries), and which are measurable and attributable to the CDM project activity. CDM projects may also lead to environmental externalities in other domains, such as water, biodiversity, or local air pollution. Here, the narrow definition is used of increases in GHG emissions elsewhere resulting from demand and supply changes in production factors that change relative factor prices and, in particular, the energy price. A small CDM project would normally be assumed not to have any impact on market prices. Nevertheless, when aggregated, the CDM may have important impacts on leakage. Climate-change research has estimated the extent of carbon leakage to an order of 5–20%. Only recent work is doing more specific assessment of carbon leakage linked with the CDM. The Marrakesh Accords stipulate specifically that the PDD should contain a quantification of CDM project leakage, but there has been little progress on reporting standards. In general, leakage is seen as a phenomenon of the pollution haven hypothesis: if stricter environmental regulation increases the relative shadow cost of GHG emissions in one country or region, then the production generating those emissions may move away from the country or region. On the one hand, one may thus argue that the CDM should decrease leakage, as it reduces the shadow cost differential between Annex I and non-Annex I countries. On the other hand, a CDM project may change input factor prices and energy output prices, in particular reduce the local energy price, which could yield an increase in local energy demand high enough to outweigh the reduction in carbon emissions intensity brought about by projects investing in CO2 reduction. This is similar to a scale effect that outbalances the technical efficiency effect sought after with the CDM when it concerns energy supply or demand investments. The most recent work on the topic thus tries to quantify these opposing effects to assess the overall leakage that can be attributed to the CDM.
Contribution to Sustainable Development The contribution to sustainable development of the CDM may be appraised on several dimensions: environmental (e.g., the impact on the local environment), social (e.g., the share of the project’s net benefits that are recuperated by the poor, the project’s contribution to human and social development), and economic (e.g., the project’s impact on local employment and the regional economy). The emission reductions funded through the CDM are unevenly distributed across regions and countries: as seen in
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Figure 2, China and India represent the largest share of CERs and only a very small percentage of projects are implemented in Africa (Figures 1 and 2). Concerns of the actual contribution of CDM to sustainability have arisen because of the type of projects as well and the local distribution of their benefits. The large part of GHG emission reductions undertaken in the chemical industry can be claimed to have had little impact, if any at all, on sustainability in the host countries. The distribution of benefits from local projects is often considered unequal. There are now several analyses that are trying to assess the sustainability contribution of CDM projects in a rigorous manner. Some criticize the impact on the local environment; in some cases, there are trade-offs between local health benefits and the global public good of GHG mitigation. Others find a low priority on improving access to energy sources among the poorest in local society. The origins of the CDM were based on the argument that constructing new clean energy sources in developing countries would be of lower cost than retrofitting energy plants in developing countries. In the first years of the CDM, few energy efficiency or renewable energy projects were developed though. In order to improve on the distribution of project types, the EB has developed simplified baseline accounting procedures for small-scale projects on renewable energy with a maximum output capacity equivalent to 15 MW and energy efficiency improvement projects that reduce energy consumption by up to the equivalent of 60 GWh year1. Forest management and conservation was excluded from the CDM for the first commitment period (2008–2012). The new mechanism ‘Reducing Emissions from Deforestation and Degradation’ (REDD þ), separate from the CDM, may provide a means to target, more explicitly, this GHG mitigation potential and do so in a manner that will benefit the rural poor.
Technology Transfers The CDM has also been evaluated on its capacity to improve transfer of technology that helps mitigate GHG emissions. Although the CDM does not have any explicit objective of technology transfer, the UNFCCC explicitly mentions that parties should cooperate in the diffusion, adoption, and transfer of environmentally friendly technologies as a means to achieve the overall objective of stabilizing anthropogenic climate change. Any assessment of the CDM on this issue has to compare it to alternative policies, in particular a cap and trade scheme. The comparison will then depend on the access to the permit market, the competitiveness of output markets as well as the character of the investment concerned. Our understanding of the differences in technology diffusion between flexible mechanisms is still at the initial stage, and recent theoretical advances will shed more light on the issue. The empirical evidence, on the contrary, shows that technology transfers have taken place in at least 30% of the CDM projects, and possibly even half of them, but that it depends to a great extent on the host country and the type of project. The countries that have hosted the most projects with technology transfers included are Mexico, Malaysia, Brazil, China, and India. Since China and India tend to implement unilateral projects, technology transfer has been more limited in those countries compared to similar projects in the other main host countries of the CDM. On one hand, existing national technological capacities
increase the likelihood of technology transfer; on the other hand, the larger the cumulative stock of projects of the same type in the host country, the less likely is a technology transfer. The likelihood of technology transfers depends very much on the type of project; for example, projects involving the mitigation of non-CO2 GHG emissions more often included technology transfers than others. It is not straightforward to measure technology transfers, though, as the term may be included in the PDD, but details on the exact nature of the knowledge or equipment transferred and whether it was previously available in the host country or not may be lacking. Most studies still tend to conclude that technology transfers are more likely: the larger the project, the stronger are the bilateral ties between the parties – in the form of existing foreign direct investments (FDIs) or trade links – and the better is the business climate and governance of the host country. Transfers have also been found to depend significantly on whether the host party was a subsidiary to a company in a developed country. It is thus not clear whether the CDM has advanced technology transfer to a further extent than that which would occur through FDI or existing bilateral trade relations. COP-16 in Cancun decided to establish a Technology Mechanism to further enhance the diffusion of GHG mitigation technology.
Conclusion: The Role of the CDM Post Kyoto Many of the problems with the CDM stem from the fact that the transfers of emission reductions occur between parties with uneven standing, that is, parties with quantified emission reduction commitments and parties without any quantitative obligation of emission reduction. In an exchange of Allocated Amounts Units between parties with quantified objectives defined in Annex B of the Kyoto Protocol, both parties are liable should the emission ceiling be exceeded, whereas in the CDM the host country has no binding emission limit. Several observers thus consider the CDM as a transition phase, following which upper-middle-income economies would proceed to take on quantified emission reduction commitments. Concerns about the CDM are also based on arguments of the inefficiency of a project-based mechanism versus an emissions market and the high administrative costs that are obstacles to the diffusion of CDM projects outside of some major host countries. In equity terms, the mechanism has been challenged for the low share of projects and CERs from low-income countries. Although not an explicit objective of the CDM, technology transfer is included in the UNFCCC and the CDM has been evaluated on its role of furthering technology transfer between Annex I countries and non-Annex I countries. Here too, technology transfers seem to occur only to a limited extent, notably in large projects and projects based on existing bilateral ties such as existing trade or FDI relations. Reform proposals for the CDM include further streamlining and simplification of the registration and validation process not just to minimize transaction costs – in particular for small-scale projects – but also because it is now clear that the mechanism needs to be reconsidered in a more fundamental manner. The changes that are the most discussed for a future CDM are policy and sectoral CDM, to substitute for the CDM’s current project basis. The idea is that countries pool
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several projects and measures in one sector into one CDM sectoral program and obtain CERs for emission reductions obtained from a predefined baseline for the sector. The advantage of sectoral CDM is that the GHG mitigation potential can be tapped in entire sectors such as residential energy efficiency, or transportation, where the CDM has not made inroads so far (see the distribution of CERs according to the type of project in the section ‘The Distribution of CDM Projects According to Region and Type’). Programmatic CDM already exists in the CDM rulebook and could be a basis for further development of policy-based CDM for entire sectors. A potential problem with this approach is that it does nothing to solve the incentives to manipulate host country baselines. Rather, it may amplify them by delaying projects or national policies that otherwise would otherwise have been implemented. Others favor a sectoral regional approach, in particular, to avoid potential carbon leakage. Here, CERs would stem from projects regrouped on an industry sector basis. The advantage of this approach is that it would strive toward the goal of each industry facing the same price per GHG emission regardless of its location. Despite the uncertainty about the future of the CDM, it has enabled a nonnegligible total sum of emission reductions. Some of these emission reductions may have come at a higher cost than necessary (recall the debate surrounding the initially high part of HFC and PFC reduction), but to a large extent the CDM has brought forward low-cost mitigation options that help in achieving the emission reduction commitments of Annex I countries. Most debaters agree that the CDM has been less successful when it comes to its other main goal, achieving sustainable development in non-Annex I countries. Part of this failure may result from weak definitions and verification of sustainability, by DNAs that do not necessarily have the correct incentives to genuinely implement such change from a political economy perspective. The EB has attempted to solve this by excluding or restricting certain types of projects from the CDM, but the distribution of projects could still be improved, both in terms of the kind of projects and their geographical location. The main success of the CDM thus has to be its pivotal role in keeping certain key developing countries interested in staying in the Kyoto Protocol framework. A critical review of the narrow geographical distribution of CDM projects concentrated in four major newly industrialized countries has to note that they are the
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countries with the highest economic growth rates and, thus, the countries that should be key participants in a future climate treaty.
See also: Climate Change and Policy: Carbon Offsets; Economics of Forest Carbon Sequestration as a Climate Change Mitigation Strategy; Markets/Technology Innovation/Adoption/Diffusion: Technological Change and Climate Change Policy; Media: Biological: Reducing Emissions from Deforestation and Forest Degradation.
Further Reading Dechezlepreˆtre A, Glachant M, and Me´nie`re Y (2008) The clean development mechanism and the international diffusion of technologies: An empirical study. Energy Policy 36: 1273–1283. Figueres C and Streck C (2009) A post-2012 vision for the clean development mechanism. (Chapter 26) In: Freestone D and Streck C (eds.) Legal Aspects of Carbon Trading: Kyoto, Copenhagen and Beyond, pp. 562–582. New York: Oxford University Press. Hagem C (2009) The clean development mechanism versus international permit trading: The effect on technological change. Resource and Energy Economics 31(1): 1–12. Kallbekken S (2007) Why the CDM will reduce carbon leakage. Climate Policy 7(3): 197–211. Lecocq F and Ambrosi P (2007) The clean development mechanism: History, status and prospects. Review of Environmental Economics and Policy 1(1): 134–151. Narain U and van’t Veld K (2008) The clean development mechanism’s low-hanging fruit problem: When it might arise and how it might be solved? Environmental and Resource Economics 40(3): 445–465. Olsen KH (2007) The clean development’s mechanism’s contribution to sustainable development: A review of the literature. Climate Change 84: 59–73. Rose A, Bulte E, and Folmer H (1999) Long-run implications for developing countries of joint implementation of greenhouse gas mitigation. Environmental and Resource Economics 14(1): 19–31. Seres S, Haites E, and Murphy K (2010) The contribution of the clean development mechanism under the kyoto protocol to technology transfer. UNFCCC Report. Vo¨hringer F, Kuosmanen T, and Dellink R (2006) How to attribute market leakage to CDM projects. Climate Policy 5: 503–516. Wara M (2007) Is the global carbon market working? Nature 445: 595–596. World Bank (2011) State and Trends of the Carbon Market 2011. Washington, DC: World Bank.
Relevant Websites http://cdmpipeline.org – The UNEP Risoe CDM/JI Pipeline Analysis and Database. http://cdm.unfccc.int/index.html – The UNFCCC CDM website.