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CDM directs here. For other uses see CDM (disambiguation) The Clean Development Mechanism ('''CDM''') is an arrangement under the Kyoto Protocol allowing industrialised countries with a Greenhouse Gas reduction commitment (so-called Annex 1 countries) to invest in emission reducing projects in developing countries as an alternative to what is generally considered more costly emission reductions in their own countries. In principle, the CDM allows for a drastic reduction of costs for the industrialised countries, while achieving the same amount of emission reductions as without the CDM. In practise, however the emission reductions may be less with CDM than without it and may lead to unsustainable practises. The CDM is supervised by the CDM Executive Board (CDM EB) and is under the guidance of the Conference of the Parties (COP/MOP) of the United Nations Framework Convention On Climate Change (UNFCCC). HISTORY AND PURPOSE The CDM arose out of the negotiations of the Kyoto Protocol in 1997. The United States government desired that there be as much flexibility in achieving emission reductions as possible and desired a possibility of international emissions trading to achieve the emission reductions where it could be done at least cost. During the time it was considered a controversial element and was opposed throughout by environmental NGOs and initially by developing countries who felt that industrialised countries should put their own house in order first and feared the environmental integrity of the mechanism would be too hard to guarantee (see #Environmental Concerns below). Eventually, and largely on US insistence, CDM and two other Flexible Mechanisms were written into the Kyoto protocol. The purpose of the CDM was defined under Article 12 of the Kyoto Protocol. Apart from helping Annex 1 countries comply with their emission reduction commitments, it must assist developing countries in achieving sustainable development, while also contributing to stabilization of greenhouse gas concentrations in the atmosphere. To ensure that industrial countries from making unlimited use of CDM, Article 12 has a provision that use of CDM be ‘supplemental’ to domestic actions to reduce emissions. The CDM gained momentum in 2005 after the entry into force of the Kyoto Protocol which was a key risk factor for investors. Nevertheless, the throughput has been less than expected due to understaffing and lack of resources at the EB. CDM PROJECT PROCESS Outline of the project process An industrialised country who wishes to get credits from a CDM project must obtain the consent of the developing country hosting the project that it will contribute to sustainable development. Then, using methodologies approved by the CDM Executive Board (EB), the applicant (the industrialised country in our case) must make the case that the project would not have happened anyway (establishing additionality), and must establish a baseline estimating the future emissions in absence of the registered project. The case is then verified by a third party agency, a so-called Designated Operational Entity to ensure the project results in real, measurable, and long-term emission reductions. Upon final approval by the Executive Board a number of Certified Emission Reductions, CERs, are awarded to the applicant based on the difference between the baseline and the actual emissions. Establishing additionality To avoid giving credits to projects that would have happened anyway, rules have been specified to ensure additionality of the project, i.e. to ensure that the project reduces emissions more than would have occurred in the absence of the registered CDM project activity. There are currently two important rivalling interpretations of the additionality criterion: # What is often labelled ‘environmental additionality’ has that a project is additional if the emissions from the project are lower than the baseline. It generally looks at what would have happened without the project. # In the other interpretation which is sometimes termed ‘investment’ or ‘financial’ additionality’, the project must also have happened without the CDM.. With the first interpretation, the door would be wide open for free-riders and emissions would be reduced less with the CDM than without it, and at lower cost for the industrialised countries. It is never possible to establish with certainty what would have happened without the CDM or in absence of a particular project, which is one of the common objections to CDM. Nevertheless, an educated guess can be made using the guidelines set by the CDM Executive Board for assessing additionality. Despite heavy pressure from industry and Western governments in favour of a less strict interpretation of additionality, the financial additionality interpretation currently prevails. Establishing a baseline The amount of emission reduction, obviously, depends on the emissions that would have occurred without the project. The construction of such a hypothetical scenario is known as the baseline of the project. The baseline may be estimated through reference to emissions from similar activities and technologies in the same country or other countries, or to actual emissions prior to project implementation. However, the partners involved in the project have a clear interest in establishing a baseline with high emissions and this brings the risk of awarding spurious credits if insufficiently strict independent review is absent. FINANCIAL ISSUES With costs of emission reduction typically much lower in developing countries than in industrialised countries, industrialised countries can comply with their emission reduction targets at much lower cost by being receiving credits for emissions reduced in developing countries as long as administration costs are low. IPCC has projected GDP losses for OECD Europe with full use of CDM and Joint Implementation to between 0.13 and 0.81 % of GDP versus 0.31 to 1.50 % with only domestic action. Current trading prices illustrate that it is cheaper to buy emission reduction from CDM projects than domestic emission reductions: whereas domestic emission reductions in Europe in 2005 typically would cost on the order of €50 per tonne CO2 equivalent, CER from the CDM could in the same year be purchased for as little as €4 - €9 per tonne CO2 equivalent[http://www.jiqweb.org/jiq3-05.pdf . The environmental value of the two alternatives may be different, however. ENVIRONMENTAL CONCERNS ''The risk of spurious credits'' As CDM is an alternative to domestic emission reductions, the perfectly working CDM would produce no more and no less greenhouse gas emission reductions than without use of the CDM. However, it was recognized from the beginning that if projects that would have happened anyway are registered as CDM projects, the use of CDM will result in higher total emissions, as the spurious credits will be used to allow higher domestic emissions while not delivering lower emissions in the developing country hosting the CDM project. Similarly, spurious credits may be awarded through overstated baselines. The NGO CDM Watch argues that a majority of the CDM projects so far (2005) would have happened anyway, referring among other reasons to project activities completed before final approval as CDM projects, and arguing that these would be viable without the CDM financing, and therefore non-additional. NGOs have also criticized the inclusion of large hydropower projects as CDM projects which they deem unsustainable. Other concerns are the lack of renewable energy CDM projects and the inclusion of Sinks {Link without Title} as CDM projects. In response to concerns of unsustainable projects or spurious credits, the WWF and other NGOs devised a ‘Gold Standard’ {Link without Title} methodology for certifying projects that used much stricter criteria than required, such as allowing only renewable energy projects. CDM PROJECTS TO DATE As of 20 January 2005, 73 projects had been registered by the CDM Executive Board as CDM projects These projects reduce greenhouse gas emissions by an estimated 28,240,562 ton CO2 equivalent per year (for comparison: The current emissions of the EU-15 are about 4,200,000,000 ton CO2 equivalent per year[http://themes.eea.eu.int/IMS/ISpecs/ISpecification20040909113419/IAssessment1118392868101/view_content ). Around 54 % of these CDM reductions come from two N2O reduction projects, 29 % from HFC oxidation projects, 8 % from landfill gas related projects, and most of the remaining from hydropower and biomass projects. SEE ALSO EXTERNAL REFERENCES
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