Clean Development Mechanism

and to invest in emission reductions where it is cheapest

globally (Grubb, 2003, p. 159).[4] Between 2001, which
was the rst year CDM projects could be registered and
7 September 2012, the CDM issued 1 billion Certied
Emission Reduction units.[5] As of 1 June 2013, 57% of
all CERS had been issued for projects based on destroying either HFC-23 (38%) or N2 O (19%).[6] Carbon capture and storage (CCS) was included in the CDM carbon
osetting scheme in December 2011.[7]

Certified emission reduction spot prices 2012

5

Price Euros

However, a number of weaknesses of the CDM have been

identied (World Bank, 2010, p. 265-267). Several of
these issues were addressed by the new Program of Activities (PoA) that moves to approving 'bundles of projects
instead of accrediting each project individually. In 2012,
the report Climate change, carbon markets and the CDM:
A call to action said governments urgently needed to address the future of the CDM. It suggested the CDM was
in danger of collapse because of the low price of carbon and the failure of governments to guarantee its existence into the future. Writing on the website of the
Climate & Development Knowledge Network, Yolanda
Kakabadse, a member of the investigating panel for the
report and founder of Fundacion Futuro Latinamericano,
said a strong CDM is needed to support the political consensus essential for future climate progress. Therefore
we must do everything in our hands to keep it working,
she said.[8]

Source: https://www.theice.com/marketdata/reports/ReportCenter.shtml

0
Jan

Mar

May

Jul

Sep

Nov

Jan

Date

Certied emission reduction units (CERs) monthly spot prices

2012

The Clean Development Mechanism (CDM) is one

of the exibility mechanisms dened in the Kyoto Protocol (IPCC, 2007) that provides for emissions reduction projects which generate Certied Emission Reduction units which may be traded in emissions trading
schemes.[1]
The CDM is dened in Article 12 of the Protocol, and
is intended to meet two objectives: (1) to assist parties
not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of
the United Nations Framework Convention on Climate
Change (UNFCCC), which is to prevent dangerous climate change; and (2) to assist parties included in Annex I in achieving compliance with their quantied emission limitation and reduction commitments (greenhouse
gas (GHG) emission caps).[2] Annex I parties are those
countries that are listed in Annex I of the treaty, and are
the industrialized countries. Non-Annex I parties are developing countries.

1 History
The CDM is one of the exibility mechanisms that is
dened in the Kyoto Protocol. The exibility mechanisms are designed to allow Annex B countries to meet
their emission reduction commitments with reduced impact on their economies (IPCC, 2007).[1] The exibility
mechanisms were introduced to the Kyoto Protocol by the
US government. Developing countries were highly skeptical and ercely opposed to the exibility mechanisms
(Carbon Trust, 2009, p. 6).[3] However, in the international negotiations over the follow-up to the Kyoto Protocol, it has been agreed that the mechanisms will continue.

The CDM addresses the second objective by allowing the

Annex I countries to meet part of their emission reduction commitments under the Kyoto Protocol by buying
Certied Emission Reduction units from CDM emission
reduction projects in developing countries (Carbon Trust,
2009, p. 14).[3] The projects and the issue of CERs is
subject to approval to ensure that these emission reductions are real and additional. The CDM is supervised by
the CDM Executive Board (CDM EB) and is under the 2 Purpose
guidance of the Conference of the Parties (COP/MOP)
of the United Nations Framework Convention on Climate The purpose of the CDM is to promote clean developChange (UNFCCC).
ment in developing countries, i.e., the non-Annex I
The CDM allows industrialized countries to buy CERS countries (countries that aren't listed in Annex I of the
1

3 CDM PROJECT PROCESS

Framework Convention). The CDM is one of the Protocols project-based mechanisms, in that the CDM is
designed to promote projects that reduce emissions. The
CDM is based on the idea of emission reduction production (Toth et al., 2001, p. 660).[9] These reductions
are produced and then subtracted against a hypothetical baseline of emissions. The emissions baseline are
the emissions that are predicted to occur in the absence
of a particular CDM project. CDM projects are credited against this baseline, in the sense that developing
countries gain credit for producing these emission cuts.

initial years of operation yielded fewer CDM credits than

supporters had hoped for, as Parties did not provide sufcient funding to the EB. This left it understaed.

The economic basis for including developing countries

in eorts to reduce emissions is that emission cuts are
thought to be less expensive in developing countries than
developed countries (Goldemberg et al., 1996, p. 30;[10]
Grubb, 2003, p. 159).[4] For example, in developing
countries, environmental regulation is generally weaker
than it is in developed countries (Sathaye et al., 2001,
p. 387-389).[11] Thus, it is widely thought that there is
greater potential for developing countries to reduce their
emissions than developed countries.

3 CDM project process

From the viewpoint of bringing about a global reduction in emissions, emissions from developing countries
are projected to increase substantially over this century
(Goldemberg et al., 1996, p. 29).[10] Infrastructure decisions made in developing countries could therefore have a
very large inuence on future eorts to limit total global
emissions (Fisher et al., 2007).[12] The CDM is designed
to start o developing countries on a path towards less
pollution, with industrialised (Annex B) countries paying
for these reductions.
There were two main concerns about the CDM (Carbon
Trust, 2009, pp. 1415). One was over the additionality
of emission reductions produced by the CDM (see the
section on additionality). The other was whether it would
allow rich, northern countries, and in particular, companies, to impose projects that were contrary to the development interests of host countries. To alleviate this concern, the CDM requires host countries to conrm that
CDM projects contribute to their own sustainable development. International rules also prohibit credits for
some kind of activities, notably from nuclear power and
avoided deforestation.

The Adaptation Fund was established to nance concrete

adaptation projects and programmes in developing countries that are Parties to the Kyoto Protocol. The Fund is
to be nanced with a share of proceeds from clean development mechanism (CDM) project activities and receive
funds from other sources.

3.1 Outline
An industrialised country that wishes to get credits from
a CDM project must obtain the consent of the developing country hosting the project that the project will contribute to sustainable development. Then, using methodologies approved by the CDM Executive Board (EB),
the applicant (the industrialised country) must make the
case that the carbon 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 validated by a
third party agency, called a Designated Operational Entity (DOE), to ensure the project results in real, measurable, and long-term emission reductions. The EB then decides whether or not to register (approve) the project. If a
project is registered and implemented, the EB issues credits, called Certied Emission Reductions (CERs, commonly known as carbon credits, where each unit is equivalent to the reduction of one metric tonne of CO2 e, e.g.
CO2 or its equivalent), to project participants based on
the monitored dierence between the baseline and the
actual emissions, veried by the DOE.

3.2 Additionality
To avoid giving credits to projects that would have happened anyway (freeriders), rules have been specied to
ensure additionality of the proposed project, that is, to ensure the project reduces emissions more than would have
occurred in the absence of the intervention created by the
CDM.[13] At present, the CDM Executive Board deems a
project additional if its proponents can document that realistic alternative scenarios to the proposed project would
be more economically attractive or that the project faces
barriers that CDM helps it overcome. Current Guidance
from the EB is available at the UNFCCC website.[14]

To prevent industrialised countries from making unlimited use of CDM, the framework has a provision that use
of CDM be supplemental to domestic actions to reduce
emissions. This wording has led to a wide range of interpretations - the Netherlands for example aims to achieve
half of its required emission reductions (from a BAU
baseline) by CDM. It treats Dutch companies purchases
of European Emissions Trading Scheme allowances from
companies in other countries as part of its domestic ac3.3
tions.

Baseline

The CDM gained momentum in 2005 after the entry into

The determination of additionality and the calculation of
force of the Kyoto Protocol. Before the Protocol entered
emission reductions depends on the emissions that would
into force, investors considered this a key risk factor. The
have occurred without the project minus the emissions

4.1

Diculties with the CDM

of the project. Accordingly, the CDM process requires

an established baseline or comparative emission estimate.
The construction of a project baseline often depends on
hypothetical scenario modeling, and 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. The
partners involved in the project could have an interest in
establishing a baseline with high emissions, which would
yield a risk of awarding spurious credits. Independent
third party verication is meant to avoid this potential
problem.

3
Boost transfers of clean, less polluting technologies
to developing countries.

According to Burniaux et al. (2009, p. 37), the costsaving potential of a well-functioning crediting mechanism appears to be very large. Compared to baseline
costs (i.e., costs where emission reductions only take
place in Annex I countries), if the cap on oset use was
set at 20%, one estimate suggests mitigation costs could
be halved. This cost saving, however, should be viewed
as an upper bound: it assumes no transaction costs and
no uncertainty on the delivery of emission savings. Annex I countries who stand to gain most from crediting include Australia, New Zealand, and Canada. In this eco3.4 Methodologies
nomic model, non-Annex I countries enjoy a slight income gain from exploiting low cost emission reductions.
Any proposed CDM project has to use an approved base- Actual transaction cost in the CDM are rather high, which
line and monitoring methodology to be validated, ap- is problematic for smaller projects.[20] This issue is adproved and registered. Baseline Methodology will set dressed by the Program of Activities (PoA) modality.
steps to determine the baseline within certain applicability conditions whilst monitoring methodology will set
specic steps to determine monitoring parameters, qual- 4.1 Diculties with the CDM
ity assurance, equipment to be used, in order to obtain
data to calculate the emission reductions. Those approved Carbon leakage
methodologies are all coded:[15]
In theory, leakage may be reduced by crediting mechanisms (Burniaux et al., 2009, p. 38). In practice, the
AM - Approved Methodology
amount of leakage partly depends on the denition of
ACM - Approved Consolidated Methodology
the baseline against which credits are granted. The curAMS - Approved Methodology for Small Scale Projects rent CDM approach already incorporates some leakage.
Thus, reductions in leakage due to the CDM may, in fact,
ARAM - Aforestation and Reforestation Approved
be small or even non-existent.
Methodologies
Additionality, transaction costs and bottlenecks
All baseline methodologies approved by Executive Board
are publicly available along with relevant guidance on the In order to maintain the environmental eectiveness of
UNFCCC CDM website.[16] If a DOE determines that the Kyoto Protocol, emission savings from the CDM must
a proposed project activity intends to use a new base- be additional (World Bank, 2010, p. 265).[21] Without
line methodology, it shall, prior to the submission for additionality, the CDM amounts to an income transfer
registration of this project activity, forward the proposed to non-Annex I countries (Burniaux et al., 2009, p. 40).
methodology to the EB for review, i.e. consideration and Additionality is, however, dicult to prove, and is the
subject of vigorous debate.[13]
approval, if appropriate.[17]
Burniaux et al. (2009) commented on the large transaction costs of establishing additionality. Assessing ad4 Economics
ditionality has created delays (bottlenecks) in approving
CDM projects. According to World Bank (2010), there
According to Burniaux et al., 2009, p. 37, crediting are signicant constraints to the continued growth of the
mechanisms like the CDM could play three important CDM to support mitigation in developing countries.
roles in climate change mitigation :[18]
Incentives
The CDM rewards emissions reductions, but does not pe Improve the cost-eectiveness of GHG mitigation nalize emission increases (Burniaux et al., 2009, p. 41).
policies in developed countries
It therefore comes close to being an emissions reduction
Help to reduce leakage (carbon leakage) of subsidy. This can create a perverse incentive for rms to
emissions from developed to developing countries. raise their emissions in the short-term, with the aim of
Leakage is where mitigation actions in one coun- getting credits for reducing emissions in the long-term.
try or economic sector result in another countrys
or sectors emissions increasing, e.g., through relocation of polluting industries from Annex I to nonAnnex I countries (Barker et al., 2007).[19]

Another diculty is that the CDM might reduce the incentive for non-Annex I countries to cap their emissions.
This is because most developing countries benet more
from a well-functioning crediting mechanism than from a

4
world emissions trading scheme (ETS), where their emissions are capped. This is true except in cases where the
allocation of emissions rights (i.e., the amount of emissions that each country is allowed to emit) in the ETS is
particularly favourable to developing countries.
Local resistance
While the C in CDM stands for Clean, most projects
might be better dened with the B from Big, from large
hydropower to HFC or waste to energy and clean coal
projects (which all together make the majority of credits
generated through CDM). The argument in favor of the
CDM is that it brings development to the South. However, in all continents the mainly Big Development it
stands for is resisted by local people in those countries. A
global coalition of researchers published a large report on
African civil society resistance to CDM projects all over
the continent.[22] In New Delhi, India, a grassroots movement of wastepickers is resisting another CDM project[23]
on what the makers call 'the waste war' in Delhi. In
Panama, a CDM project is blocking peace talks between
the Panamanian government and the indigenous NgbeBugl people.[24] Civil society groups and researchers in
both North and South have complained for years that
most CDM projects benet big industries, while doing
harm to excluded people. As local protests against CDM
projects are arising on every continent, the notion that
CDM 'brings development to the South' is contested.
Market deation
Most of the demand for CERs from the CDM comes from
the European Union Emissions Trading Scheme which is
the largest carbon market. In July 2012, the market price
for CERs fell to new record low of 2.67 euros a tonne.
This represented a change in price of about 70 percent
in a year. Analysts attributed the low CER price to lower
prices paid for European Union emissions allowances, the
over supply of EU emissions allowances and the slowing
European economy.[25]
In September 2012, The Economist described the CDM
as a complete disaster in the making and in need of
a radical overhaul. This was because carbon prices, including prices for CERS, had collapsed, from $20 a tonne
in August 2008 to below $5 in response to the Eurozone debt crisis reducing industrial activity and the overallocation of emission allowances under the European
Union Emissions Trading Scheme.[26] The Guardian reported that the CDM has essentially collapsed, due to
the prolonged downward trend in the price of CERs,
which had been traded for as much as $20 (12.50) a
tonne before the global nancial crisis to less than $3.
With such low CER prices, potential projects were not
commercially viable.[27] In October 2012, CER prices fell
to a new low of 1.36 euros a metric tonne on the London ICE Futures Europe exchange.[28] In October 2012
Thomson Reuters Point Carbon calculated that the oversupply of units from the Clean Development Mechanism
and Joint Implementation would be 1,400 million units

5 FINANCIAL ISSUES
for the period up to 2020 and Point Carbon predicted
that Certied Emission Reduction (CER) prices would
to drop from 2 to 50 cents.[29] On 12 December 2012
CER prices reached another record low of 31 cents.[30]
Bloomberg reported that Certied Emission Reduction
prices had declined by 92 percent to 39 each cents in the
2012 year.[31]

5 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 receiving credits
for emissions reduced in developing countries as long as
administration costs are low.
The 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%[32] with only domestic action.
While there would always be some cheap domestic emission reductions available in Europe, the cost of switching from coal to gas could be in the order of 40-50 per
tonne CO2 equivalent. Certied Emission Reductions
from CDM projects were in 2006 traded on a forward
basis for between 5 and 20 per tonne CO2 equivalent. The price depends on the distribution of risk between seller and buyer. The seller could get a very good
price if it agrees to bear the risk that the projects baseline and monitoring methodology is rejected; that the
host country rejects the project; that the CDM Executive Board rejects the project; that the project for some
reason produces fewer credits than planned; or that the
buyer doesn't get CERs at the agreed time if the international transaction log (the technical infrastructure ensuring international transfer of carbon credits) is not in
place by then. The seller can usually only take these risks
if the counterparty is deemed very reliable, as rated by
international rating agencies.

5.1 Mitigation nance

The revenues of the CDM constitutes the largest source of
mitigation nance to developing countries to date (World
Bank, 2010, p. 261-262).[21] Over the 2001 to 2012 period, CDM projects could raise $18 billion ($15 billion
to $24 billion) in direct carbon revenues for developing
countries. Actual revenues will depend on the price of
carbon. It is estimated that some $95 billion in clean energy investment benetted from the CDM over the 200208 period.

6.1

Transportation

5.2

Adaptation nance

By 14 September 2012, 4626 projects had been registered

by the CDM Executive Board as CDM projects.[34] These
projects are expected to result in the issue of 648,232,798
certied emissions reductions.[35] By 14 September 2012,
the CDM Board had issued 1 billion CERS, 60% of which
originated from projects in China. India, the Republic of
Korea, and Brazil were issued with 15%, 9% and 7% of
the total CERS.[36]

The CDM is the main source of income for the UNFCCC

Adaptation Fund, which was established in 2007 to nance concrete adaptation projects and programmes in
developing countries that are parties to the Kyoto Protocol (World Bank, 2010, p. 262-263).[21] The CDM is
subject to a 2% levy, which could raise between $300
million and $600 million over the 2008-12 period. The
The Himachal Pradesh Reforestation Project is claimed
actual amount raised will depend on the carbon price.
to be the worlds largest CDM.[37]

CDM projects

6.1 Transportation

Certified emission reduction units by country

India 14.7%

There are currently 29 transportation projects registered,

the last was registered on February 25, 2013 and is hosted
in China. [38]

6.2 Destruction of HFC-23

R. of Korea 9.1%

Brazil 7.2%

Mexico 1.6%
Chile 1.0%
Argentina 0.9%
Others 5.4%
China 59.9%

Data: http://cdm.unfccc.int/Statistics/Issuance/CERsIssuedByHostPartyPieChart.html

Certied emission reduction units (CERs) by country October

2012

Since 2000, the CDM has allowed crediting of projectbased emission reductions in developing countries (Gupta
et al., 2007).[33] By 1 January 2005, projects submitted
to the CDM amounted to less than 100 MtCO2 e of projected savings by 2012 (Carbon Trust, 2009, p. 18-19).[3]
The EU ETS started in January 2005, and the following
month saw the Kyoto Protocol enter into force. The EU
ETS allowed rms to comply with their commitments by
buying oset credits, and thus created a perceived value
to projects. The Kyoto Protocol set the CDM on a rm
legal footing.

Some CDM projects remove or destroy industrial gases,

such as hydrouorocarbon-23 (HFC-23) and nitrous oxide (N2O). HFC-23 is a potent greenhouse gas (GHG)
and is a byproduct from the production of the refrigerant
gas chlorodiuoromethane (HCFC-22).[3] The gas HFC23 is estimated to have a global warming eect 11,000
times greater than carbon dioxide, so destroying a tonne
of HFC-23 earns the refrigerant manufacturer 11,000
certied emissions reduction units.[39]
In 2009, the Carbon Trust estimated that industrial gas
projects such as those limiting HFC-23 emissions, would
contribute about 20% of the CERS issued by the CDM
in 2012. The Carbon Trust expressed the concern that
projects for destroying HFC-23 were so protable that
coolant manufacturers could be building new factories
to produce the coolant gas. (Carbon Trust, 2009, p.
60).[3] In September 2010, Sandbag estimated that in
2009 59% of the CERs used as osets in the European
Union Emissions Trading Scheme originated from HFC23 projects.[40]
An example is the Plascon, Plasma arc plant that was installed by Quimobsicos S.A. de C.V in Monterrey, Mexico to eliminate of HCFC-23, a byproduct of the production of R-22 refrigerant gas.
From 2005 to June 2012, 19 manufacturers of refrigerants (11 in China, 5 in India, and one each in Argentina,
Mexico and South Korea),[41] were issued with 46% of
all the certied emissions reduction units from the CDM.
David Hanrahan, the technical director of IDEAcarbon
believes each plant would probably have earned an average of $20 million to $40 million a year from the
CDM. The payments also incentivise the increased production of the ozone-depleting refrigerant HCFC-22, and
discourage substitution of HCFC-22 with less harmful
refrigerants.[39]

By the end of 2008, over 4,000 CDM projects had been

submitted for validation, and of those, over 1,000 were
registered by the CDM Executive Board, and were therefore entitled to be issued CERs (Carbon Trust, 2009, p.
19). In 2010, the World Bank estimated that in 2012,
the largest potential for production of CERs would be
from China (52% of total CERs) and India (16%) (World
Bank, 2010, p. 262).[21] CERs produced in Latin America and the Caribbean would make up 15% of the potential total, with Brazil as the largest producer in the region
In 2007 the CDM stopped accepting new refrigerant
(7%).

8 VIEWS ON THE CDM

manufacturers into the CDM. In 2011, the CDM renewed

contracts with the nineteen manufacturers on the condition that claims for HFC-23 destruction would be limited to 1 percent of their coolant production. However,
in 2012, 18 percent of all CERS issued are expected to
go to the 19 coolant plants, compared with 12 percent
to 2,372 wind power plants and 0.2 percent to 312 solar
projects.[39]
In January 2011, the European Union Climate Change
Committee banned the use of HFC-23 CERs in the
European Union Emissions Trading Scheme from 1 May
2013. The ban includes nitrous oxide (N2O) from adipic
acid production. The reasons given were the perverse incentives, the lack of additionality, the lack of environmental integrity,the under-mining of the Montreal Protocol, costs and ineectiveness and the distorting eect of a
few projects in advanced developing countries getting too
many CERs.[42] From 23 December 2011, CERs from
HFC-23 and N2O destruction projects were banned from
use in the New Zealand Emissions Trading Scheme, unless they had been purchased under future delivery contracts entered into prior to 23 December 2011. The use
of the future delivery contracts ends in June 2013.[43]

Transaction costs and CDM process requirements: These are geared more towards the most advanced developing countries, and do not work well
for the projects most often found in LDCs.

8 Views on the CDM

8.1 Additionality
8.1.1 Emissions

One of the diculties of the CDM is in judging whether

or not projects truly make additional savings in GHG
emissions (Carbon Trust, 2009, p. 54-56).[3] The baseline which is used in making this comparison is not observable. According to the Carbon Trust (2009), some
projects have been clearly additional: the tting of equipment to remove HFCs and N2 O. Some low-carbon electricity supply projects were also thought to have displaced
coal-powered generation. Carbon Trust (2009) reviewed
some approved projects. In their view, some of these
projects had debatable points in their additionality assessAs of 1 June 2013, the CDM had issued 505,125 CERs, ments. They compared establishing additionality to the
or 38% of all CERs issued, to 23 HFC-23 destruction balance of evidence in a legal system. Certainty in addiprojects. A further 19% (or 255,666 CERs) had been tionality is rare, and the higher the proof of additionality,
issued to 108 N2 O destruction projects.[6]
the greater the risk of rejecting good projects to reduce
emissions.

Barriers

8.1.2 Types

World Bank (n.d., p. 12) described a number of barri- Additionality is a much contested. There are many rival
ers to the use of the CDM in least developed countries interpretations of additionality:
(LDCs).[44] LDCs have experienced lower participation
in the CDM to date. Four CDM decisions were high1. What is often labelled environmental additionality
lighted as having a disproportionate negative impact on
has that a project is additional if the emissions from
LDCs:
the project are lower than the baseline. It generally looks at what would have happened without the
Suppressed demand: Baseline calculations for
project.
LDCs are low, meaning that projects cannot generate sucient carbon nance to have an impact.
2. Another interpretation, sometimes termed project
additionality, the project must not have happened
Treatment of projects that replace nonwithout the CDM.
renewable biomass: A decision taken led to
essentially a halving in the emission reduction
potential of these projects. This has particularly A number of terms for dierent kinds of additionality
aected Sub-Saharan Africa and projects in poor have been discussed, leading to some confusion, particucommunities, where rewood, often from non- larly over the terms 'nancial additionality' and 'investrenewable sources, is frequently used as a fuel for ment additionality' which are sometimes used as synonyms. 'Investment additionality', however, was a concooking and heating.
cept discussed and ultimately rejected during negotia Treatment of forestry projects and exclusion of tion of the Marrakech Accords. Investment additionality
agriculture under the CDM: These sectors are carried the idea that any project that surpasses a certain
more important for LDCs than for middle-income risk-adjusted protability threshold would automatically
countries. Credits from forestry projects are penal- be deemed non-additional.[45] 'Financial additionality' is
ized under the CDM, leading to depressed demand often dened as an economically non-viable project becoming viable as a direct result of CDM revenues.
and price.

8.2

Concerns

Many investors argue that the environmental additionality interpretation would make the CDM simpler. Environmental NGOs have argued that this interpretation
would open the CDM to free-riders, permitting developed countries to emit more CO, while failing to produce emission reductions in the CDM host countries.[46]
Gillenwater (2011) evaluated the various denitions of
additionality used within the CDM community and provided a synthesis denition that rejects the notion of there
being dierent types of additionality.[13][47][48]

7
8.2.1 Overall eciency
Pioneering research has suggested that an average of approximately 30% of the money spent on the open market buying CDM credits goes directly to project operating and capital expenditure costs.[52][53] Other signicant
costs include the brokers premium (about 30%, understood to represent the risk of a project not delivering)
and the project shareholders dividend (another 30%).
The researchers noted that the sample of projects studied
was small, the range of gures was wide and that their
methodology of estimating values slightly overstated the
average brokers premium.

Schneider (2007) produced a report on the CDM for the

WWF.[49] The ndings of the report were based on a
systematic evaluation of 93 randomly chosen registered
CDM projects, as well as interviews and a literature survey (p. 5). According to Schneider (2007, p. 72), the 8.2.2 The risk of fraud
additionality of a signicant number of projects over the
2004-2007 period seemed to be either unlikely or quesOne of the main problems concerning CDM-projects is
tionable.
the risk of fraud.[54][55][56] The most common practices
It is never possible to establish with certainty what would are covering up the fact that the projects are nancially
have happened without the CDM or in absence of a par- viable by themselves and that the emission reductions acticular project, which is one common objection to the quired through the CDM-project arent additional. ExagCDM. Nevertheless, ocial guidelines have been de- gerating the carbon benets is also a common practice,
signed to facilitate uniform assessment,[50] set by the just as carbon leakage. Sometimes a company even proCDM Executive Board for assessing additionality.
duces more to receive more CERs.

8.1.3

Views on additionality

An argument against additionality is based on the fact that

developing countries are not subject to emission caps in
the Kyoto Protocol (Mller, 2009, pp. iv, 9-10).[51] On
these basis, business-as-usual (BAU) emissions (i.e.,
emissions that would occur without any eorts to reduce
them) in developing countries should be allowed. By setting a BAU baseline, this can be interpreted as being a
target for developing countries. Thus, it is, in eect, a restriction on their right to emit without a cap. This can be
used as an argument against having additionality, in the
sense that non-additional (i.e., emission reductions that
would have taken place under BAU) emission reductions
should be credited.

Most of the doubtful projects are Industrial gas projects.

Even though only 1.7% of all CDM-projects can be qualied as such, extraordinarily they account for half[57] to
69%[58] of all CERs that have been issued, contributing
to a collapse in the global market for all CERs.[57] Since
the cost of dismantling these gases is very low compared
to the market price of the CERs, very large prots can be
made by companies setting up these projects.[59] In this
way, the CDM has become a stimulus for carbon leakage, or even to simply produce more.[55][59][60]

Hydro-projects are also quite problematic. Barbara Haye

calculated that more than a third of all hydro-projects
recognized as a CDM-project were already completed
at the time of registration and almost all were already
under construction,[61] which means that CERs are issued for projects that arent additional, which again indirectly leads to higher emissions.[62] Moreover, most
carbon benets of these projects are
Mller (2009) argued that compromise was necessary be- of the proposed
[55]
exaggerated.
tween having additionality and not having it. In his view,
additionality should sometimes be used, but other times, Why are these projects approved by the
it shouldn't.
Clean_Development_Mechanism Executive Board
According to World Bank (n.d., pp. 1617), additionality (EB)?, one might wonder. One of the main problems is
is crucial in maintaining the environmental integrity of that the EB is a highly politicized body. People taking
the carbon market.[44] To maintain this integrity, it was a place in the board arent independent technocrats,
suggested that projects meeting or exceeding ambitious but are elected as representatives of their respective
policy objectives or technical standards could be deemed countries. They face pressure from their own & other
(powerful) countries, the World Bank (that subsidizes
additional.
certain projects), and other lobbying organisations. This,
combined with a lack of transparency regarding the
decisions of the board leads to the members favouring political-economical over technical or scientic
8.2 Concerns
considerations.[54][60][63] It seems clear that the CDM

8 VIEWS ON THE CDM

isnt governed according to the rules of good gover- 8.2.4 Reasons for including avoided deforestation
nance. Solving this problem might require a genuine
projects in the CDM
democratization in the election of the EB-members and
thus a shift in thinking from government to governance.
In practice this would mean that all the stakeholders Combating global warming has broadly two components:
decreasing the release of greenhouse gases and sequestershould get a voice in who can have a seat in the EB.
ing greenhouse gases from the atmosphere. Greenhouse
Another important factor in the dysfunctionality of the gas emitters, such as coal-red power plants, are known as
EB is the lack of time, sta and nancial resources it has sources, and places where carbon and other greenhouse
to fully evaluate a project proposal.[55] Moreover, the ver- gases, such as methane, can be sequestered, i.e. kept out
ication of a project is often outsourced to companies that of the atmosphere, are known as sinks.
also deliver services (such as accounting or consultancy)
to enterprises setting up these same projects. In this way, The worlds forests, particularly rain forests, are importhe veriers have serious incentives to deliver a positive tant carbon sinks, both because of their uptake of CO2
report to the EB.[54][55][60][64] This indicates that imple- through photosynthesis and because of the amount of carmentation is the place where the shoe pinches, as usually bon stored in their woody biomass and the soil. When
happens in environmental issues (mostly due to a lack of rain forests are logged and burned, not only do we lose
the forests capacity to take up CO2 from the atmosphere,
funds).[65]
but also the carbon stored in that biomass and soil is reFinally, it should be noted though that there have been leased into the atmosphere through release of roots from
indications in recent years that the EB is becoming more the soil and the burning of the woody plant matter.
strict in its decisions, due to the huge criticism and the
An emerging proposal, Reduced Emissions from Avoided
board getting more experience.[63]
Deforestation and Degradation (REDD), would allow
rain forest preservation to qualify for CDM project status. REDD has gained support through recent meetings
of the COP, and will be examined at Copenhagen.

8.2.3

Exclusion of forest conservation/avoided deforestation from the CDM

8.2.5 Coal thermal power generation in India and
China

The rst commitment period of the Kyoto Protocol excluded forest conservation as well as avoided deforestation from the CDM for a variety of political, practical
and ethical reasons.[66] However, carbon emissions from
deforestation represent 18-25% of all emissions,[67] and
will account for more carbon emissions in the next ve
years than all emissions from all aircraft since the Wright
Brothers until at least 2025.[68] This means that there have
been growing calls for the inclusion of forests in CDM
schemes for the second commitment period from a variety of sectors, under the leadership of the Coalition
for Rainforest Nations, and brought together under the
Forests Now Declaration, which has been signed by over
300 NGOs, business leaders, and policy makers. There is
so far no international agreement about whether projects
avoiding deforestation or conserving forests should be initiated through separate policies and measures or stimulated through the carbon market. One major concern
is the enormous monitoring eort needed in order to
make sure projects are indeed leading to increased carbon storage. There is also local opposition. For example, May 2, 2008, at the United Nations Permanent Forum on Indigenous Issues (UNPFII), Indigenous leaders
from around the world protested against the Clean Energy
Mechanisms, especially against Reducing emissions from
deforestation and forest degradation.

In July 2011, Reuters reported that a 4,000 MW coal

thermal electricity generation plant in Krishnapatnam
in Andhra Pradesh had been registered with the CDM.
CDM Watch and the Sierra Club criticised the plants
registration and its eligibility for certied emission reduction units as clearly not additional. A CDM spokesperson
dismissed these claims. According to information provided to Reuters, there are total of ve coal-red electricity plants registered with the CDM, four in India with
a capacity of 10,640 MW and one 2,000 MW plant in
China. The ve plants are eligible to receive 68.2 million
CERs over a 10-year period with an estimated value of
661 million euros ($919 million) at a CER price of 9.70
euros.[69]
In September 2012, the Executive Board of the Clean
Development Mechanism adopted rules conrming that
new coal thermal power generation plants could be registered as CDM projects and could use the simplied
rules called 'Programmes of Activities. The organisation
CDM-Watch described the decision as inconsistent with
the objective of the CDM as it subsidised the construction of new coal power plants. CDM-Watch described
the CERs that would be issued as non-additional dirty
carbon credits.[70]

8.2
8.2.6

Concerns

Industrial gas projects

CERs from hydropower projects are not listed on European carbon exchanges, because dierent member states
Some CERs are produced from CDM projects at interpret these limitations dierently.
refrigerant-producing factories in non-Annex I countries
that generate the powerful greenhouse gas HFC 23 as a
by-product. These projects dominated the CDMs early 8.2.8 Other concerns
growth, and are expected to generate 20% of all credited emission reductions by 2012 (Carbon Trust, 2009, Renewable energy
p. 60).[3] Paying for facilities to destroy HFC-23 can cost In the initial phase of the CDM, policy makers and NGOs
only 0.2-0.5 /tCO2 . Industrialized countries were, how- were concerned about the lack of renewable energy CDM
ever, paying around 20 /tCO2 for reductions that cost projects. As the new CDM projects are now predomibelow 1 /tCO2 . This provoked strong criticism.
nantly renewables and energy eciency projects, this is
The scale of prots generated by HFC-23 projects threatened distortions in competitiveness with plants in industrialized countries that had already cleaned up their
emissions (p. 60). In an attempt to address concerns
over HFC-23 projects, the CDM Executive Board made
changes in how these projects are credited. According to
the Carbon Trust (2009, p. 60), these changes eectively
ensure that:

now less of an issue.[72]

Sinks

NGOs, as well as several governments, have consistently

been sceptical towards the inclusion of sinks as CDM
projects. The main reasons were fear of oversupply, that
such projects cannot guarantee permanent storage of carbon, and that the methods of accounting for carbon storage in biomass are complex and still under development.
Consequently, two separate carbon currencies (tempo the potential to capture emissions from these plants rary CERs and long-term CERs) were created for such
is exploited;
projects. Such credits cannot be imported to the European Unions Emission Trading Scheme. The lack of de distortions are reduced;
mand for such projects have resulted in very limited supply: Currently (21 July 2008), only one sinks project has
and the risk of perverse incentives is capped.
been registered under CDM.

Carbon Trust (2009, p. 60) argued that criticizing the

CDM for nding low-cost reductions seemed perverse.
They also argued that addressing the problem with targeted funding was easy with hindsight, and that before
the CDM, these emission reduction opportunities were
not taken.

8.2.7

Hydropower

NGOs have criticized the inclusion of large hydropower

projects, which they consider unsustainable, as CDM
projects. Lately, both the CDM EB and investors have become concerned about such projects for potential lack of
additionality. One reason was that many of these projects
had started well before applying for CDM status. In June
2008, third party validator TV SD Group rejected a
hydropower project in China because the project proponents could not document that they had seriously considered CDM at the time the project was started. In July
2008, third party validators agreed that projects applying
for CDM status more than one year after having taken
their investment decision should not qualify for CDM status. Currently, the largest power plant to receive CDM
registration is the Jirau Hydroelectric Plant in Brazil.[71]
Hydropower projects larger than 20 MW must document
that they follow World Commission on Dams guidelines
or similar guidelines in order to qualify for the European
Unions Emissions Trading Scheme. As of 21 July 2008,

Windfarms in Western Sahara

In 2012, it was announced, that a windfarm complex
is going to be located near Laayoune, the capital city
of the disputed territory of Western Sahara. Since this
project is to be established under tight collaboration between the UN (which itself recognizes Western Saharas
status of a non-autonomous country) and the Moroccan government, it has been questioned by many parties
supporting Western Sahara independence, including the
Polisario.[73]

8.2.9 Suggestions
In response to concerns of unsustainable projects or spurious credits, the World Wide Fund for Nature and other
NGOs devised a Gold Standard methodology to certify projects that uses much stricter criteria than required,
such as allowing only renewable energy projects.[74]
For example, a South African brick kiln was faced with a
business decision; replace its depleted energy supply with
coal from a new mine, or build a dicult but cleaner
natural gas pipeline to another country. They chose to
build the pipeline with SASOL. SASOL claimed the difference in GHG emissions as a CDM credit, comparing emissions from the pipeline to the contemplated coal
mine. During its approval process, the validators noted
that changing the supply from coal to gas met the CDMs
'additionality' criteria and was the least cost-eective

10

10

option.[75] However, there were unocial reports that the

fuel change was going to take place anyway, although this
was later denied by the companys press oce.[76]

8.3

Successes

REFERENCES

[8] Kakabadse, Yolanda. 20 October 2012. Safeguarding the

Clean Development Mechanism will benet Southern and
Northern nations alike
[9] Toth, F.L. et al. (2001). Decision-making Frameworks.
In: Climate Change 2001: Mitigation. Contribution of
Working Group III to the Third Assessment Report of
the Intergovernmental Panel on Climate Change (B. Metz
et al. Eds.)". Cambridge University Press, Cambridge,
U.K., and New York, N.Y., U.S.A. Retrieved 2010-0110.

Schneider (2007, p. 73) commented on the success of

the CDM in reducing emissions from industrial plants
and landlls.[49] Schneider (2007) concluded by stating
that if concerns over the CDM are properly addressed,
it would continue to be an important instrument in the [10] Goldemberg, J. et al. (1996). Introduction: scope of the
assessment. In: Climate Change 1995: Economic and Soght against climate change.

See also
Certied Emission Reduction
Obtaining ownership of land by productive use
Climate, Community & Biodiversity Alliance
China Carbon Forum (CCF)
Veried Carbon Standard
Additionality

10

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[28] Vitelli, Alessandro (October 20, 2012). UN Carbon
Declines to Record as EU Moves to Ban ERU Credits.
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[40] Carbon markets: The smoking greenhouse gun. The
Economist. 2 September 2010. Retrieved 24 January
2013. According to Sandbag, an outt that monitors carbon markets, 59% of the CERs used as osets in the
EU cap-and-trade scheme in 2009 came from HFC-23
projects
[41] Rosenthal, Elizabeth; Lehren, Andrew W (August 8,
2012). Subsidies for a Global Warming Gas - Graphic.
The New York Times. Retrieved September 19, 2012.
[42] Hedegaard, Connie (January 21, 2011). Emissions trading: Commission welcomes vote to ban certain industrial
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[43] Regulations restricting the use of HFC-23 and N2O
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[30] Allan, Andrew (December 12, 2012). U.N. osets crash

to 15 cents ahead of EU ban vote. Point Carbon. Retrieved December 16, 2012.

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prices cap another losing year. The Age. Retrieved 14
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[47] Gillenwater, M. What Is Additionality? Part 2: A framework for a more precise denitions and standardized approaches. Retrieved 10 December 2014.
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[49] Schneider, L. (5 November 2007). Is the CDM fullling
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12

[52] Carbon Retirement report: The Eciency of Carbon

Osetting through the Clean Development Mechanism.
2009-12-07. Retrieved 2011-05-24.
[53] Kahya, Damian (2009-12-07). "'30% of carbon osets
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[54] VODO vzw & 11.11.11. CDM: schoon genoeg? Vlaams
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[58] UNEP Ris Centre. CDM projects grouped in types.
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[59] Schneider, L.; Lazarus, M.; Kollmuss, A (October 2010).
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[60] Wara, M. W.; Victor, D. G. (April 2008). A Realistic
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[64] Bachram, H. (2004). Climate Fraud and Carbon Colonialism: The New Trade in Greenhouse Gases. Capitalism, Nature, Socialism 15 (4).
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[66] A New Initiative to Use Carbon Trading for Tropical Forest Conservation] William F. Laurance(2007), Biotropica
39 (1), 2024

12

EXTERNAL LINKS

[69] Fogarty, David (Jul 12, 2011). Carbon credits for India coal power plant stoke criticism. Reuters. Retrieved
September 18, 2012. ...ve high-eciency coal power
plants have been registered under the CDM -- four in India and one in China -- meaning they are all eligible to
earn CERs that they can sell.
[70] Against Own Technical Advice, UN decides to subsidize,
remove safeguards, for dirty coal power plants (Press release). CDM-WATCH. 13 September 2012. Retrieved
10 October 2012.
[71] Brazils Jirau hydro project worlds largest CDMregistered renewable plant. Hydro World. 6 May 2013.
Retrieved 30 Dec 2014.
[72] World Bank, State and Trends of the Carbon Market,
2010
[73] http://www.wsrw.org/a105x2329
[74] CDM Gold Standard
[75] CDM Project 0177 Lawley Fuel Switch Project UNFCCC
[76] Carbon trade watch

11 Further reading
Boyd, E. et al (October 2007). The Clean Development Mechanism: An assessment of current
practice and future approaches for policy. Tyndall
Centre for Climate Change Research. Retrieved
September 18, 2012.
Hepburn, C. (November 2007). Carbon Trading:
A Review of the Kyoto Mechanisms. Annual
Review of Environment and Resources 32: 375393.
doi:10.1146/annurev.energy.32.053006.141203.
Retrieved May 20, 2009.
The ultimate climate change FAQ (July 26, 2011).
What is the Clean Development Mechanism
(CDM)?". The Guardian. Retrieved September 20,
2012.

12 External links
Home page of United Nations website on Clean Development Mechanisms
Capacity development for the CDM
Spreadsheet of Hydro Projects in the CDM Project
Pipeline, International Rivers

[67] Stern, N. 2006. Stern Review of the Economics of Climate Change

Clean Development Mechanism projects in &

around India

[68] Forests First in the Fight Against Climate Change, Global

Canopy Programme, 2007

Designated National Authority of India for CDM

Projects

13
UN Clean Development Mechanism prole on
database of market governance mechanisms

14

13

13
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