implementing the Kyoto Protocol, the United Nations has designated two
arrangements (or flexibility mechanisms) through which countries can
offset emissions within their borders by investing in projects
elsewhere. These are the Clean Development Mechanism (CDM)
and Joint Implementation (JI), and they differ chiefly in what
obligations the target country has under the Kyoto Protocol.
Clean Development Mechanism
CDM governs arrangements between countries with obligations to reduce
emissions under the Protocol (so-called Annex I countries) and
countries without obligations. Under CDM, projects can be
developed in countries without obligations to reduce or avoid
greenhouse gas (GHG) obligations, generating credits (Certified
Emissions Reductions) which can be sold to Annex I countries and used
toward meeting Kyoto obligations.
The mechanism stimulates sustainable development and emission
reductions, while giving industrialized countries some flexibility in
how they meet their emission reduction limitation targets.
Since its inception is 2006, more than 1,000 projects have already been
registered under CDM. The UNFCCC estimates that by the end of the
first commitment period of the Kyoto Protocol in 2012, CER’s equaling
more than 2.7 Bt of CO2 equivalent.
Joint Implementation (or JI) is a flexibility mechanism whereby a
country with emissions limitation obligations under Kyoto can generate
credits by investing in projects in other countries with
obligations. This differs from the CDM chiefly in that, under
JI, emissions reducing projects are financed by Annex I countries
and take place in other Annex I countries. Whereas the objective
of CDM projects is to reduce baseline emissions within (typically
developing) countries while fostering green development and technology
transfer, JI focuses on using trade between capital and emissions
reductions within an already-industrialized milieu, hopefully
encouraging the cleanest technological practices.
Bumps in the Road
The flexibility mechanisms might be described as having yielded mixed
success. One point of controversy for the CDM in particular
is additionality, or the financing of projects for emissions reductions
which would have taken place anyway. A well-designed CDM project
blueprint (or methodology) should be able to verify that the proposed
project is actually responsible for reducing GHG emissions against an
all-else-being-equal baseline, and that ecconomic conditions in the
host country or region would not allow that project to go forward
without the additional financing provided under CDM. This has,
perhaps not surprsisingly, been difficult to establish in many actual
circumstances, and the problem - or perception thereof- may contribute
the types of criticism which liken credit brokering to "selling of
A complaints sometimes levelled by project designers lies in the
perception of bottlenecking at the approval level. Under
CDM, independent auditors, called Designated Operational Entities, have
been appointed to validate the soundness of project methodology and,
following apporval, to certify performance.
With the rush to register before the 2008-2012 reductions period
under Kyoto, a large project pipeline developed as thousands of
projects were filtered through a limited number of DOE's. Yet
another problem has been in the distribution of approved projects, with
nearly a quarter being in China, while areas such as sub-Saharan Africa
have been virtually left out of the CDM process. In negotiating
the successors to the Kyoto mechanisms, the UN is taking the DOE and
the distributional issues into account.
Probably the best lesson to take away from working out the
world's first flexible emissions trading mechanisms is that the guiding
bodies are learning from the mistakes. With the expiration
of the Kyoto Protocol after 2012, much work is going into instituting
successors to CDM and JI with an eye towards continuing what has worked
and fixing what went wrong.
Energy Edge Partner Karl Schultz
has worked in the climate mitigation and adaptation finance sector for
more than a decade. If you have questions concerning flexible
mechanisms for creating emissions rights, please feel free to
contact him today.
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