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An Analysis of Clean Development Mechanism
- 1. An Analysis of the Clean Development Mechanism (A Project Presentation prepared for the partial fulfilment of ED76.11 Natural Resource Management) Presented By: Pradeep Baral Katika Punbuatoom
- 2. Kyoto Protocol Flexibility Mechanisms (Source – UNITAR/UNEP) Joint Implementation (JI) (Article 6) Clean Development Mechanism (CDM) (Article 12) Emissions Trading (ET) (Article 17)
- 3. Clean Development Mechanism • Allows a country with emission-reduction commitment to implement an emission reduction project in developing countries • Such projects can earn saleable Certified Emission Reduction (CER) credits • Each CER is equivalent to one ton of CO2 equivalent which can then be counted towards meeting Kyoto targets (Source - http://unfccc.int/kyoto_protocol/mechanisms/clean_development_mechanism/items/2718.php)
- 4. Twin Objectives of CDM • to help developed countries fulfil their commitments to reduce emissions, and • to assist developing countries in achieving sustainable development. (Source - http://cdm.unfccc.int/about/dev_ben/index.html)
- 5. CDM – Additionality Criterion • Article 12.5 of the Kyoto Protocol: "Emission reductions resulting from each CDM project activity shall be certified...on the basis of...reductions in emissions that are real, measurable, and additional to any that would occur in the absence of the certified project activity” Financial Additionality Cannot be ‘anyway would have happened project’ Should not divert the Official Development Aid (ODA) Environmental Additionality Overall amount of GHGs abated by the project relative to a baseline Emission reductions should be real and measurable (Source - http://figueresonline.com/csdafinal/english/publications/cdm/es.baumert.html)
- 6. CDM Project Cycle Project Participants develop PDD, using approved EBMM Project participants secure letter of approval from DNA PDD is validated by DOE Project submitted by DOE to CDM EB. Registration is the formal acceptance of CDM Project Project participant responsible to monitor emissions DOE verifies whether actual emission reduction took place DOE submits verification report to CDM EB with request to issue CER Source - http://cdm.unfccc.int/Projects/diagram.html
- 7. The Demand Side of CERs • European Union (Under EU ETS scheme) • Sovereign buyers – Annex I countries such as Japan, Australia and Canada • Multilateral Development Banks and Carbon Funds – World Bank Carbon Partnership Facility, ADB Carbon Market Program (Source - http://carbonmarketwatch.org/category/eu-ets/, Dhakal (2013))
- 8. CDM Project Transaction Costs Source - http://www.slideshare.net/juanpadominguez/global-distribution-of-cdm-projects
- 9. Decision Flowchart for CDM Project (Source – Transaction Cost and CDM, Chadwick (2006))
- 10. CDM Project History (As of February, 2015) Status of CDM projects in the project cycle Number At validation 816 Request for registration 24 Registered, no issuance of CERs 5020 Registered, CER issued 2578 Total registered 7598 Pending Publication 202 Total Number of CDM Projects 8640 Source - http://cdmpipeline.org/overview.htm#4
- 11. Regional Distribution of CDM Projects Region Number of small-scale Number of full scale Number of all projects Latin America 412 11.8% 729 14.2% 1141 13.2% Asia & Pacific 2928 83.8% 4134 80.3% 7062 81.7% Europe and Central Asia 26 0.7% 62 1.2% 88 1.0% Africa 90 2.6% 152 3.0% 242 2.8% Middle-East 39 1.1% 68 1.3% 107 1.2% Developing World 3495 100.0% 5145 100.0% 8640 100% Source - http://cdmpipeline.org/overview.htm#4
- 12. Distribution of CERs Issued (Source - https://cdm.unfccc.int/Statistics/Public/CDMinsights/index.html#iss) 90% of all CERS issued
- 13. CDM Projects by Sector (Source - http://cdmpipeline.org/overview.htm#4)
- 14. CERs Issued by Sector Source - http://cdmpipeline.org/overview.htm#4
- 15. CDM in Second Commitment Period 2013-2020 • Doha Amendment to the Kyoto Protocol at CMP 8, Doha • Non-Annex I Parties may continue to participate in existing CDM projects and may also participate in new CDM projects registered from 1 January 2013 onward. • Annex I Parties (including those without emission targets in the second commitment period) may participate in existing and new CDM projects and may receive CERs forwarded from the CDM registry to accounts in their national registry that are issued in respect of emission reductions and removals achieved by CDM Projects in the Second Commitment Period (CP2). Source - https://cdm.unfccc.int/faq/index.html
- 16. CER Market Analysis Source: http://www.climatechangecapital.com/thinktank/research/ • Falling CER price • Market Crash
- 17. How to calculate emission reduction under the CDM? Source: www.globalccsinstitute.com
- 18. CDM Project Example Decha Bio Green Rice Husk Power Generation • 7.5 MW Rice Husk plant supply and grid export • Baseline Emission = 29,620 tCO2e/yr • Project Emission = 0 tCO2e • Leakage Calculation = 0 tCO2e • Emission Reduction = 29,620 tCO2e/yr • Electricity delivered to the Thailand Grid = 51,246,000 kWh Source: https://cdm.unfccc.int/Projects/DB/RWTUV1251209528.4/view
- 19. Advantages of CDM • Contribute positively to the local environment • Improving quality of life of people • Contribute positively to the economy in parallel • Provide an additional financial contribution • Encourage Foreign Direct Investment and technology transfers • An additional source of income by CERs Source: https://cdm.unfccc.int/about/dev_ben/ABC_2012.pdf
- 20. Challenges of CDM Source: Stadelmann et al. 2013 1. Many Non-Additional Projects 2. Lack of Political Willingness 3. Perverse Incentives 4. Limited Contributed to Local Sustainable Development 5. Imbalance Regional distribution 6. Opportunity Cost 7. The Risk of Carbon Market
- 21. Increasing demand side Reducing supply side • Advanced developing countries using CERs domestically in ETS • Directly required CERs from government • The alternative potential demand for CERs in Airline and Maritime Industry • Discounting of CERs by host- country • Excluding projects from the CDM • Qualitative restrictions and changing the length of crediting periods, and additionally check Recommendations for CDM rescue options Source: Stadelmann et al. 2013
- 22. Conclusion
Editor's Notes
- Transaction costs are part of almost any trade or investment. In economics theory, the price of a commodity is at an equilibrium when it equals the marginal cost of production. However, in order to get the product from the producer (seller) to the consumer (buyer), there are often additional costs beyond the production. These may include costs of – or of time lost during – negotiations and regulatory processes, as well as legal or banking fees and opportunity costs, among others. Transaction costs include expenditures that are over and beyond production costs. Transaction costs raise the price of a product beyond the marginal cost of production, thereby reducing demand for the product. Transaction costs associated with the CDM can be incurred at the project level, the national level and the multilateral level1. These may include: Project Design cost, National Approval cost, Validation cost, Registration Cost, Verification cost, Certification costs and a 2% contribution to adaptation fund for all CERs generated and sold in a particular year.
- The CDM is a project-based emissions trading mechanism. To work effectively, it requires detailed rules upon which to base emission reduction calculations so that there is consistency and comparability in the results achieved for different project types. This is fundamental for the functioning of a fair and equitable trading system. The level of reductions achieved by a specific project is based on several components covering firstly, what the counterfactual scenario would be in the absence of the project (the ‘baseline’) and the emissions associated with such a scenario (‘baseline emissions’). Second the boundary of the activity and the emissions occurring within that boundary (as monitored during implementation i.e. the ‘project emissions’), and third, whether the project leads to any changes in emissions outside of its boundaries (what is called ‘leakage’).
- This project has the purpose to selling renewable electricity to the Thailand national power grid. The rice husk fuel consumed in the power plant is a waste by-product of rice milling. Commissioning of the project was completed on 25/03/2009 when the project began selling electricity to the grid. Therefore, the power plant was fully operational prior to commencement of the CDM crediting period on 17/02/2010. The steam turbine generator, boiler and biomass combustion system utilized by the power plant produce electricity from renewable rice husk.
- Clean Development Mechanism (CDM) is a mechanism that is based on the Kyoto Protocol. It is a scheme for GHG emission reduction through cooperation between developed countries (Annex I Parties) which are committed to certain GHG emission reduction targets under the Kyoto Protocol, and developing countries (non-Annex I Parties), which do not have any commitments to reduce GHG emissions. The purpose of CDM is to assist to accomplish the GHG reduction targets of developed countries under the Kyoto Protocol, as well as to contribute to sustainable development of non-Annex I Parties (host countries). Under the CDM, Annex I Parties are able to acquire all or parts of the credits (certified emission reductions (CERs)) which result from the projects. Non-Annex I Parties will benefit from the CDM projects. Although CDM has benefits for host countries and investors, it also has challenges of unexpected results. The recent crash in prices of CDM credits or CERs due to reduce demand and oversupply has led to the reduction of lost of incentive in long-terms for climate change mitigation. Any rescue options create to maintain the prices of CER to restore the confidence of private sector and ensure that it can play an important role in mitigating climate change in the long run.