Clean Development Mechanism

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The Clean Development Mechanism (CDM) is one of three market-based mechanisms established under the Kyoto Protocol as a means of allowing the industrialized Annex 1 countries to meet their national targets by investing in lower cost carbon emission reduction projects in developing countries. (The other two mechanisms are Emissions Trading and Joint Implementation.) While the CDM operates under the oversight of the Conference of the Parties (COP/MOP) of the United Nations Framework Convention on Climate Change (UNFCCC) and proclaimed as a "trailblazer", it has been criticized by some environmental and other non-governmental organizations as ineffective and counter-productive.

The CDM is the world's largest carbon offset market. Its growth has been rapid. "In 2007, the value of the CDM market totaled €12 billion, more than triple the previous year's figure," according to an academic analysis. "The CDM project pipeline has grown in four years from essentially nothing to more than 3000 projects either registered or in the process of achieving the necessary regulatory approvals."

Operations

On its website the UNFCCC states that the CDM operates by accrediting projects "in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2. These CERs can be traded and sold, and used by industrialized countries to meet a part of their emission reduction targets under the Kyoto Protocol." The UNFCC argue that before projects qualify they are subjected to "a rigorous and public registration and issuance process designed to ensure real, measurable and verifiable emission reductions that are additional to what would have occurred without the project."

The CDM, which is overseen by the CDM Executive Board, came into effect in 2006 and has registered over 1,000 projects to date. The UNFCC states are "anticipated to produce CERs amounting to more than 2.7 billion tonnes of CO2 equivalent in the first commitment period of the Kyoto Protocol, 2008–2012."

Additionality and critiques

Key to the CDM is the concept of "additionality," meaning that the project receiving funding via the CDM will result in reductions in greenhouse gas emissions that would not have otherwise been achieved.

According to one analysis, the additionality criteria was easily met by early CDM projects. That's because the early projects "focused primarily on industrial gases with high global warming potential (GWP) such as hydrofluorocarbons (HFCs). ... It was relatively simple for companies undertaking HFC incineration projects to prove that their projects would not have been viable in the absence of CER revenue (and therefore met the additionality criterion), as the only revenue stream of the project was CER sales."

Later CDM projects were less clear on additionality. The CDM Executive Board reacted by expanding "the definition of additionality to encompass other tests. For example, projects can be deemed additional if their methods differ from prevailing practices in the industry (prevailing practices), or if there are specific barriers that can be identified as holding back development in the sector that would be overcome with the project (barrier analysis)." Critics argued the "barrier analysis and prevailing practices amount to awarding additionality to those who tell the best story, and that those analyses reflect a move away from objective financial measurements."

"In practice, much of the current CDM market does not reflect actual reductions in emissions, and that trend is poised to get worse," warned an analysis by two Stanford University researchers. In addition, "the actual experience under the CDM has had perverse effects in developing countries -- rather than draw them into substantial limits on emissions it has, by contrast, rewarded them for avoiding exactly those commitments." That disincentive is because developing countries can not receive CDM project funding if they have set their own emissions limits.

In addition, the CDM system makes it likely that non-additional projects are approved. "The host governments and investors that seek credit have a strong incentive to claim that their efforts are truly additional," observed the Stanford researchers. "The regulator -- in this case, the CDM Executive Board -- can't in many cases gather enough information to evaluate these claims. ... The CDM Executive Board is massively under-staffed and the CDM system relies on third-party verifiers to check the claims made by project proponents. In practice, these verifiers, who are paid by the project developers, have strong incentives to approve the projects they check. Further, there is scant oversight on the integrity of the verification process and no record of punishing verifiers for misconduct."

An Associated Press review of CDM projects, reported in January 2009, found that "hydroelectric projects, whose climate impact is most widely questioned, have quickly become the No. 1 technology in the CDM, and China in particular is rushing in to capitalize. The Chinese now have at least 763 hydro projects in the CDM approval pipeline and are adding an average of 25 a month. By 2012, those projects alone are expected to generate more than 300 million "certified emission reductions," each supposedly representing reduction of one ton of carbon dioxide. Even at recent depressed market prices, those credits would be worth $4 billion." In addition to these projects' questionable impact on global GHG emissions, the AP noted "the awkward fit between China's authoritarian system, in which complaints of official abuse abound, and Western environmental ideals."

In a March 2009 speech, the Executive Secretary of the United Nations Framework Convention on Climate Change, Yvo de Boer, defended the effectiveness of the Clean Development Mechanism and argued that it had "experienced rapid growth beyond all expectations" over its three year life. "There have been improvements to the assessment of additionality, as well as to validation and verification. The way has also been cleared for a wide array of new projects in energy efficiency and renewable energy. Yet the success of the CDM has also led to challenges and criticism, some constructive, some less so. But the CDM is what we have and, for all the criticism, it has demonstrated that it works - and that it can be scaled up. So why should the baby be thrown out with the bath water?"

Negotiations at COP14

At the commencement of the COP14 meeting in December 2008 held in Poznan, Poland, the Climate Action Network argued that the CDM "should not remain an offsetting mechanism that allows industrialized countries to trade-off their dual obligations to reduce their own emissions and to support mitigation in developing countries. Also, the CDM must not continue to rely on the ability to test the additionality of each individual project, which is simply not feasible to do accurately."

A contact group on the CDM was established following a range of concerns being raised about its operation. China, Japan and other countries complained about delays in projects being registered. China also called for more transparency and simplifying accreditation of Designated Operational Entities while African countries urged a broader distribution of funded projects. Business groups on the other hand, wanted a review of the CDM and institutional changes.

Towards the end of the conference, Earth Negotiations Bulletin noted that discussions on the CDM continued late into the night. Specific issues included "transparency of the CDM Executive Board’s decision making, accreditation of DOEs [Decision Making Entities] and application of financial penalties to non-complying DOEs. The draft decision also considers the CDM’s regional and sub-regional distribution, and includes text on: simplifying and streamlining the process and requirements; facilitating development of methodologies; and supporting identification and development of project design documents in certain countries and regions," ENB reported.

The Climate Action Network International (CAN), argued that "Extensive analysis clearly shows that a substantial proportion of CDM projects are non-additional. This non-additionality, combined with the reliance of many industrialized countries on the CDM to meet their Kyoto targets, causes the CDM to significantly undermine efforts to cut global GHG emissions. ECO is convinced that reliably proving additionality of individual projects is simply impossible since it requires knowledge about a hypothetical future. Furthermore, it is illusory to believe that private sector validators are able to bear the main responsibility for ensuring the environmental integrity of the mechanism."

CAN argued that "the only solution to these problems is to completely replace or substantially restructure the CDM in the post-2012 regime" and that a new body or a reformed CD should:

• "not be a mechanism that allows Annex I countries to offset their emission reduction obligations. Instead, industrialized countries must provide financial and technological support to developing countries in a way that is independent from and additional to their domestic emission reduction targets;"
• "a restructured CDM also must cease to rely on the ability to test the additionality of each individual project, which is simply not feasible to do accurately. In the interim, it will be important to avoid the negative aspects of the CDM, such as lack of a requirement for projects to meet internationally accepted sustainable development criteria; the distorted geographical spread of project activities; the conflict of interest of project validators and EB members; and perverse incentives associated with HFC-23 and N2O destruction projects." (See also Clean Development Mechanism and HFC-23 destruction).

ECO also noted that "Current discussions about tightening the additionality testing procedures mask the underlying problem that project development decisions are subjective, and that additionality testing is inherently inaccurate. Developers cannot 'prove' their own intentions, and external auditors (validators) cannot judge other’s motivations ... It is necessary that industrialized countries effectively support decarbonization in developing countries, and in the least developed countries, in the context of the millennium development goals. This requires replacing the current subjective additionality testing approach with more accurate means of filtering projects worthy of support, and filtering out business-as-usual activities."

ECO also outlined proposals by some NGO's on reforms of the CDM. These included that:

• "it is imperative to remove the current conflict of interest where the validators are selected and paid by the project participants. In the future, this should be done by the UNFCCC secretariat or another appropriate UNFCCC body."
• "the current arbitrary assessment of the additionality of CDM projects ... should be replaced by a set of more objective rules, such as clear definitions of “common practice” and of what constitutes a “barrier.”
• "the CMP should decide that all CDM projects must meet the social and environmental standards laid out in the CDM Gold Standard" and that "the assessment of the sustainable development contribution of a project should be undertaken by an independent institution such as, for example, the validators (if selected and paid by UNFCCC)".
• "The role of the CDM Executive Board should be changed so that a permanent professional body reporting to the EB is responsible for the day-to-day operation of the CDM. The current structure, where a parttime EB meets every one or two months for a couple of days to discuss dozens of requests for project reviews and numerous proposals for methodologies is inadequate."
• "the CMP should adopt a code of conduct for CDM Executive Board members that clarifies what constitutes a conflict of interest and ensures that Board members do not participate in discussion and decisions where they may have a conflict of interest."
• "the CMP should require that CDM Executive Board members do not work for a Designated National Authority (DNA), a validator or for an institution engaged in the CDM market."

Coal plants as emissions reduction projects

In July 2010, the Guardian reported that 12 companies have applied to the UN for hundreds of millions of emission reduction credits to subsidise "efficient" coal-fired power stations in China and India. Many of the plants would be paid for with carbon offsets bought by British and European companies in lieu of cutting their own emissions, effectively channeling billions of pounds of public money to giant energy companies to build 20 polluting coal-fired power plants on the basis that they will emit less carbon dioxide than older ones.

If, as expected, the power company applications are approved by the UN Framework Convention on Climate Change (UNFCCC), they will earn around £3.5bn at current carbon market prices, making the UN body set up to promote clean energy and reduce global climate emissions one of the world's largest provider of funds for new coal burning instead.

The rush by companies to take advantage of the UN's Clean Development Mechanism (CDM) subsidies follows the successful application for credits by the Indian Adani coal group for two large power stations at Mundra in Gujarat, India. Adani will earn around £25m a year for the lifetime of its power stations in return for using "super-critical" technology, which burns the coal at lower temperatures and emits up to 30% less carbon dioxide than conventional power plants.

Others companies are examining if they qualify. Eskom, the giant South African coal mining company controversially loaned £3.75bn by the World Bank in April 2010 to build one of the largest coal-fired power stations in the world, has said it will apply for emission reduction credits. If built, its Medupi Power Station will emit nearly 25m tonnes of CO2 a year, more than the national output of 115 individual countries. If Medupi is allowed to sell carbon offsets to Britain and other rich countries, it will be able to discount 6.5m tonnes of CO2 every year for 10 years, earning it tens of millions of pounds. It would be able offset all the emissions from a major new coal power station in the UK, effectively allowing the British government to meet its carbon-reduction targets by subsidising a plant in South Africa that would have been built anyway.

The news comes at the same time as a report into the EU Emissions Trading Scheme (ETS) by the campaign group Sandbag, which found that in 2009, European companies bought €860m of international offsets to comply with caps imposed by the ETS, but were using the funds to directly subsidise competing industries in developing countries. Sandbag says this undermines claims by these companies that caps on their emissions force business to countries outside the EU and so lead to "carbon leakage". The largest purchaser of offsets, for example - Salzgitter's Glock Satzgitter steel production plant - bought 40,000 offsets from an Indian steel project.

As of July 2011, five "high-efficiency" coal power plants were registered under the CDM -- four in India and one in China -- meaning they are all eligible to earn certified emissions reductions (CERs) that they can sell. The five registered power projects involve two from Reliance Power totalling 8,000 MW, two projects totalling 2,640 MW from Adani Power and a 2,000 MW ultra-supercritical plant by Shenergy in China. According to U.N. data, the five projects are eligible to receive a total of 68.2 million CERs over a 10-year crediting period. That is worth 661 million euros ($919 million) based on current prices of CERs traded on the European Climate Exchange of 9.70 euros. Reliance's Krishnapatnam Ultra Mega Power Project will receive 12.3 million CERs and the firm's other 4,000 MW plant, Sasan Ultra Mega Power Project in Madhya Pradesh, will receive 22.5 million. Total carbon dioxide emissions from the five projects, based on data from project design documents, over the 10-year crediting period is 673 million tonnes.

Japan

On August 8, 2010, it was reported that Japan is seeking to export low-carbon technology and equipment to nine mostly Asian countries in exchange for "right-to-pollute" credits. The Japanese government has already reached basic agreements with Indonesia, Vietnam, the Philippines, and India on such deals and plans to start talks soon with Thailand, Laos, Myanmar, China, and Peru. Japan will initially provide financial and technical help to 15 projects - many of them coal plants - in which Japanese firms will export "energy-efficient" technology and equipment to these countries. Japan emits about 1.3 billion tonnes of greenhouse gases a year, and the 15 projects, when fully implemented, are expected to buy them 5 to 10 million tonnes worth of emissions.

In Indonesia, electric power wholesaler J-Power will be building a "high-efficiency" coal-fired power plant. Among other projects, Marubeni Corp. and Tokyo Electric Power will build an advanced-technology coal-fired power station in Vietnam to obtain an annual credit worth 500,000 tonnes.

South Africa

In late February 2010, climate change activists and concerned individuals from about the globe voiced their objection to a proposed $3 billion loan that would fund two new coal-fired power plants in South Africa that would be operated by Eskom. The well organized group, which includes Climate Justice Now, groundWork and the Federation for a Sustainable Environment, vowed to pressure country directors within the World Bank to vote against the loan in March 2010 and also said they would revive the World Bank "bond boycott" that was launched last decade to end structural adjustment programs and anti-environmental project funded by the Bank.

Inger Andersen, World Bank's director for sustainable development in Africa, said the loan would support the "responsible use of coal as an interim resource for power generation, given lack of viable alternatives". The opposition groups countered, that if granted, the loan would destroy the image the World Bank is portraying of a climate-friendly financier. In order to power the new coal plants, over 40 new mines would have to be opened up in the region. The proposed plants would also increase utility rates to consumers. Large environmental groups such as the Sierra Club have signed on to a petition that opposes the loan.

India

Mundra Ultra Mega Power Project, also known as Tata Ultra Mega, is a proposed 4000 megawatt power station currently in the early stages of being financed and built. It is one of ten power stations referred to by the Indian government as Ultra Mega Power Projects, which the government aims to have built by private sector companies before 2017. The project will consist of five units of 800 megawatts (MW) each, using coal imported from Indonesia and elsewhere. It is located in the port city of Mundra in the state of Gujarat in India.

Tata Ultra Mega will sell electricity to utilities in five Indian states--Gujarat, Rajasthan and Maharashtra in western India and Haryana and Punjab in northern India. Sales will be through 25-year take-or-page Power Purchase Agreements.

As of March 2008, projected costs cited by the International Finance Corporation (IFC), a division of the World Bank, were $4.14 billion, implying a 25-year levelised tariff of INR2.26 per kWh.

According to the IFC's rationale for supporting the project, "The project is the first private sector power project in India to be based on the energy efficient supercritical technology. The use of this technology in this plant will help reduce the average Green House Gases (GHG) emissions of Indian power plants per unit of electricity generated in the country. Based on the new technology and other measures being taken by the company, the project will meet the IFC social and environmental Performance Standards. This is also IFC’s first financing of a supercritical plant anywhere in the world."

The IFC also stated that in September 2007 the Clean Development Mechanism’s Executive Board gave in principle approval for 'super-critical' coal plants being eligible for carbon credits on the grounds that "this is because the technology they use to generate power is more energy-efficient than what would otherwise be used with the given fossil fuel in developing countries. The IFC also stated that "the potential eligibility was considered by Tata Power when it bid a low tariff for the Project i.e. the ultimate beneficiary of which are India consumers."

While the Clean Development Mechanism Executive Broad backed rewarding 'super-critical' plants with carbon credits, the Center for Global Development noted that in India most of the new coal plants are already planned as super-critical without additional subsidies. Environmental Defense noted that "the extra capital cost, it appears, is at least partly offset by reduced operating costs and reduced fuel use."

In its 2009-10 annual report, Reliance Power states that CDM is a “new revenue stream for the company” and would earn a minimum of Rs3,100 crore by selling carbon credits from its ultra-mega Sasan and Krishnapatnam projects, raising question over the need for carbon credits to finance the project.

On July 12, 2011, the UN ruled that Reliance Power's Krishnapatnam Ultra Mega Power Project is eligible to earn carbon credits worth $165 million at current prices. Green organisations said the U.N. rules, or methodology, were flawed and "may lead to significant overestimation of emission reductions." The power station is the second Reliance Power project, after the Sasan Ultra Mega Power Project, to be formally registered by the United Nations under its Clean Development Mechanism. As of July 2011, five "high-efficiency" coal power plants were registered under the CDM -- four in India and one in China -- meaning they are all eligible to earn certified emissions reductions (CERs) that they can sell. Reliance Power was also seeking to earn almost Rs 2,000 crore in 10 years by registering its 4,000 MW Tilaiya Ultra Mega Power Project for carbon credits, in the company's goal to earn Rs 5,000 crore from carbon credit from the CDM with its three ultra mega power projects of 4,000 MW.

A 2011 Stockholm Environment Institute report found that project documents for Indian CDM projects "inflate the benefits of switching from subcritical to supercritical technology. Specifications of technologies currently available in the market suggest the relative efficiency and emissions improvements are likely to be on the order of 2 to 4%. In contrast, these coal projects are claiming improvements on the order of at least 11%, on average."

UN panel opposes coal plants as part of CDM

In early July 2011, a United Nations "methodology panel" submitted an analysis report to the CDM Executive Board, a body that decides on the nature of the products that can be allowed as carbon offsets under CDM, recommending suspension of carbon trading for super critical thermal plants as emission reductions claims have been overstated. The recommendation was based on review of three registered and 27 under-evaluation projects for registration with the CDM board. The original estimate of emission reduction from these projects was 34 million tonnes of carbon dioxide equivalent, but the panel found that claim to be inflated by 25% to as high as 248%. The panel found fault in baseline surveys conducted by respective countries to determine the efficiency levels of existing thermal powers plants in mid 2000, after the CDM board approved the technology, saying under-evaluation was done. CDM methodology inflates baseline calculations - further increasing the "emissions reductions" these plants can claim - because the baseline efficiency that these new plants must improve on is over 10-years-old - woefully out of date considering the progression of efficiency measures in the industry over time.

Critics also argue that the CDM carbon credits often reward companies for using "new" technology that is already standard and would be installed regardless of CDM funding, effectively just creating "a new revenue stream" and artificial credits that drive overall carbon emissions up.

Executive Board refuses to suspend credits for coal plants

On July 14, 2011, the Executive Board of the Clean Development Mechanism (CDM) refused to suspend the process whereby coal plants can earn carbon offset credits, saying the risk didn't seem serious enough, and requesting that the UN "methodology panel" take a second look at its earlier recommendation to suspend coal plants as part of carbon trading. Chinese member Maosheng Duan was reportedly the most vocally opposed to either suspending credit allocation to the plants or to ordering a revision in the methodology. Instead of a suspension, the Executive Board instructed the methodology panel members to take another look at the rules and come up with a more "convincing argument" that it is flawed. Should the panel find inadequacies that are serious enough in a second review, it is authorized to come up with an alternative methodology, which would have to be looked at by the Executive Board at its next meeting. Board Chairman Martin Hession called it a "conditional mandate for the revision to the meth[odology] panel."

Executive Board suspends credits

On Nov. 24, 2011, the CDM Executive Board decided at its 65th meeting in Durban to suspend ACM-0013, the methodology applied to supercritical coal plants to calculate emission reductions. While this suspension doesn't impact the six coal projects that are already registered, only projects that request registration within the next month do not have to wait for the revised methodology.

Executive Board re-approves credits

At a CDM Executive Board meeting in September 2012, the organization approved new rules allowing supercritical coal plants built in "developing" countries to obtain carbon credits through December 31, 2012, when the first period of the Kyoto Protocol comes to a close. There are 40 plants in China and India waiting for CDM approval, according to the Sierra Club and CDM Watch. It is uncertain how many coal plants in the queue will qualify.

According to a 2012 report on emission rights from Point Carbon, there is currently a glut of carbon credits worth 13.1 billion tons for the Kyoto period through 2012, due to low demand for credits during the economic crisis and lenient rules on the use of carbon offsets. In the next Kyoto period, the surplus could be between 16.2 and 17.2 billion tons, depending on if Australia and New Zealand participate -- more CO2 than the European Union is expected to emit over the next five years. Critics say approving coal plants will only add to the glut of credits.

After the UN executive board approved the new CDM rules for coal, prices for certified emission reduction credits fell to an all-time low of $2.01 per metric ton of CO2 equivalent.

Investigations

India

A 2012 Daily News & Analysis investigation of the CDM in India found that several projects in the country were earning large sums through the sale of carbon credits that were actually ineligible, as promoters of the projects were found to have manipulated and backdated documents to meet CDM requirements. The investigators found that this occurred since CDM validators tend to rely on the project developer’s claims of sustainability and additionality without assessing them independently, and without conducting field inspections to verify eligibility criteria. A report by International Rivers stated that one indication that most projects do not qualify under the additionality clause is that three-quarters of projects were already running at the time they were approved by the CDM.

Reports

• Michael Lazarus and Chelsea Chandler, Coal Power in the CDM: Issues and Options Stockholm Environment Institute, 2011
• Lori Pottinger, Bad Deal for the Planet: Why Carbon Offsets Aren't Working...and How to Create a Fair Global Climate Accord, International Rivers Network, May 2008.
• Carbon Trade Watch, The Carbon Neutral Myth – Offset Indulgences for your Climate, Transnational Institute (Web; Wiki), February, 2007. (Pdf)

Contacts

Official website: http://cdm.unfccc.int/index.html

Articles and resources

Related SourceWatch articles

• Clean Development Mechanism Executive Board
• Clean Development Mechanism and Big Hydropower Schemes
• Clean Development Mechanism and Carbon Capture and Storage
• Clean Development Mechanism and HCFC-23 destruction
• Clean Development Mechanism and Nuclear Power
• Tata Ultra Mega

External resources

• CDM-Watch.org
• SinksWatch

External articles

• Payal Parekh, "Wikileaks and the CDM" Payal Parekh: Climate and Energy Expert, Sep. 9, 2011.
• John Vidal, "Billions wasted on UN climate programme: Energy firms routinely abusing carbon offset fund, US studies claim," Guardian (UK), May 26, 2008.
• Ted Nace, "The World's Dumbest Project: Tata Ultra Mega," Gristmill, March 20, 2008.
• Zeke Hausfather, "Kyoto Accord Compliance Markets: Can Emission Trading Offsets Work?" Yale Forum on Climate Change and the Media, August 7, 2008.