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Clean Development Mechanism (CDM)

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The Clean Development Mechanism (CDM) refers to a market mechanism for achieving greenhouse gas emissions reduction and is defined in Article 12 of the Kyoto Protocol - an international treaty for emissions reductions.  CDM allows an industrialized/developed country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol (called as Annex I Party or Annex B Party of the original Kyoto Protocol signed in 1997) to implement an emission-reduction project in any of those developing countries (which may otherwise be not financially capable of undertaking such projects), thereby earning them tradable Certified Emission Reduction (CER) credits, each equivalent to one tonne of CO2. The saleable CERs earned from such projects can be counted towards meeting the prescribed Kyoto targets.

CDM is one of the three market-based mechanisms set up under Kyoto Protocol, the other two being - Joint Implementation and emissions trading or commonly called as carbon trading [which provides for trading of (a) spare emission units available with any entity (savings from the assigned or permissible emission levels), (b) CERs created from CDM activities, (c) an emission reduction unit (ERU) generated by a Joint Implementation project and (d) removal units (RMU) created on the basis of land use, land-use change and forestry (LULUCF) activities such as reforestation]  

The mechanism of Joint implementation (JI) is similar to CDM but with the difference that the emission reduction projects are undertaken by an Annex I country in another Annex I country and not in a developing country. The mechanism of “joint implementation” is defined in Article 6 of the Kyoto Protocol. The JI allows a country with an emission reduction or limitation commitment under the Kyoto Protocol (Annex B Party) to earn emission reduction units (ERUs), each equivalent to one tonne of CO2, from an emission-reduction or emission removal project in another Annex B Party. ERUs are also counted towards meeting Kyoto targets.

CDM helps developing countries to achieve development without compromising on sustainable aspects while it gives developed countries a flexible mechanism for achieving emissions reductions. On the other hand, JI helps developed countries to refashion their development strategies through technology transfer. 

Climate change and issues related to it have become matters of heated debate among countries, scholars and the general public in the recent times. Environmental issues started gaining international attention with the Stockholm Conference held in 1972. As a result of the conference, the United Nations Environmental Programme (UNEP) was set up with the task of research on environmental impacts and for providing advice to governments and other agencies. The 1992 UN Earth Summit in Rio de Janeiro, discussed a host of environmental issues with a major focus on climate change. An agreement called UN Framework Convention on Climate Change (UNFCCC) was introduced in the 1992 Rio Summit and was signed by 166 countries. In 1997, 160 countries negotiated the Kyoto Protocol to the Framework Convention. Under the Protocol, the countries in the Annex-I of the Convention, which includes the developed nations and economies in transition, accepted binding commitments of emissions reduction targets. They agreed to reduce their emission levels of four green-house gases (CO2, Methane, Nitrous Oxide and Sulfur Hexafluoride) by 5.2% of their 1990 levels. Specific targets of reduction by 5.2 percent of their 1990 emission levels were given for 38 industrialized (Annex I) countries over the commitment period 2008-2012. The targets apply to six classes of greenhouse gases: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. Developing countries took no obligations under Kyoto. The Kyoto Protocol also provided options to the Annex-I countries to achieve their commitments in a cost-efficient manner by authorizing three different types of emissions trading schemes.

Economic theory tells that emission abatement should take place where the marginal cost of abatement is the least. One would expect that this would be the case in the developing countries. However, the developing countries lack both the financial resources as well as the technological capability to undertake major emission reductions. Add to this is the fact that the historical responsibility of the current stock of emissions lies with the developed countries.

Article 12 of the Kyoto Protocol which defines the mechanism of CDM allows certified emission reduction (CER) (each equivalent to one tonne of CO2) generated from emission reduction projects undertaken in non-Annex-I countries to be used to meet a part of their emissions reduction commitments. Thus, the mechanism allowed the countries with the responsibility to achieve emission reductions to do so in countries where the cost to do so was the least. The mechanism was expected to support sustainable development in the developing countries while allowing the industrialized countries to achieve their targets at a lower cost.

The Project Cycle in CDM
Every CDM project has to go through a cycle before it is registered and CERs are issued to the project. There are seven steps in the project cycle:
1) Project design: the first step is the preparation of a project design document by the project participant detailing the project, the baseline and methodology and other details relevant to the project;
2) National Approval: the second step is securing the letter of approval from the Designated National Entity of the host party;
3) Validation: the project is independently evaluated by a designated operating entity on whether it meets the requirements of CDM.
4) Registration: validated projects are submitted to the CDM executive board for formal approval, which is called registration;
5) Monitoring: Measurement of actual emissions is done by the project participant according to the approved methodology;
6) Verification: Is the independent review of the emission reductions claimed by the project participant by a designated operating entity.
7) CER issuance: Once the verification of the claimed emission reduction is done, the designated operating entity submits the verification report to the CDM board for the issuance of CERs.

Trends in CDM projects
As of 28th February, 2015, there were a total of 7598 registered CDM projects globally, with China and India dominating the scene since the inception of the mechanism. Around 50 per cent of the registered projects are in China and India hosts 20 per cent of all projects (Figure 1). A total of 1,542,018,787 CERs have been issued so far.

Data source: UNFCCC-CDM website

Between 2004 and 2012, there was a steady increase in the number of registered CDM projects after which there has been a drastic decline. This could be a result of the crash in CER prices in the recent times. The price of CER, which was around $ 20 a tonne in 2008, fell to below $ 5 a tonne in 2012. This may be attributed to the lack of demand from the European Union (EU), which was the major market for CERs. Due to the industrial slowdown in EU as a result of Euro crisis as well as over-allocation of carbon quotas in EU’s Emission Trading System there was slack demand for CERs.

Most of the CDM projects in India are concentrated in a few sectors, namely, those related to the renewable energy sector (Figure 2). The maximum number is in the wind energy sector. This sector accounts for 42 per cent of all CDM projects in India. Biomass energy projects come second with 15 per cent.

Data source: UNEP-Risoe CDM Pipeline database

One thing to be noted here is that the sectors where the CDM projects are concentrated in India are the ones where there are maximum co-benefits from the projects. For example, the renewable energy projects have the co-benefit of revenue generated from the sale of electricity generated from the project. Thus, questions have been raised about the ‘additionality’ of many CDM projects. However, there is no doubt that the CDM has provided many firms in developing countries with strong incentives to choose a greener path. Future global action is expected to develop new market mechanisms with elements taken from the CDM.

India, being a Non-Annex I country party to the United Nations Framework Convention on Climate Change (UNFCCC), does not have any legally binding commitment to reduce its greenhouse gas emissions. However, government has voluntarily announced to reduce emission intensity of Gross Domestic Product by 20-25% by 2020 from the 2005 level without reckoning the emissions from agriculture sector.

Institutional Arrangement for CDM in India
The Seventh Conference of Parties (COP-7) to the UNFCCC decided that Parties participating in CDM should designate a National Authority for the CDM and as per the CDM project cycle, a project proposal should include a written approval of voluntary participation from the Designated National Authority of each country and confirmation that the project activity assists the host country in achieving sustainable development. Accordingly the Central Government constituted the National Clean Development Mechanism Authority (NCDMA) in December 2003, with Secretary of Ministry of Environment and Forest as the Chairperson, for according Host Country Approval (HCA) to the CDM projects. Further, the Government has mandated large-scale CDM projects to commit and earmark 2% of revenue generated from the sale of Certified Emission Reductions (CERs) to support sustainable development activities for the local communities.

As per a press release dated 1 November 2015, till April 30, 2015, NCDMA has accorded HCA to 2,941 projects facilitating possible investment of about Rs. 579,306 crores in the country. These projects are in sectors of energy efficiency, fuel switching, industrial processes, municipal solid waste, renewable energy and forestry which spread across the country (covering all states in India). As on 24 April 2015, 1,564 out of a total of 7,629 projects registered by the CDM Executive Board are from India, which is the second highest in the world. Certified Emission Reductions (CERs) issued to Indian projects is 191 million (13.27%). The real time information on the status of CDM projects are now made available in a website in an interactive manner. May please see for more here.

A new website - has been launched by the National Clean Development Mechanism Authority (NCDMA), Ministry of Environment, Forests and Climate Change on 30 October 2015. This new website will capture the entire life cycle of CDM Projects and will also enable monitoring of the projects at different stages. The site also has the provision to monitor the commitment of the project proponents for sharing of 2% of the CERs revenue. This web-based application will promote transparency in operation and monitor sustainable development activities relating to the CDM projects in the country. It is stated to be the first such web-based application developed globally in this direction.

Also See

References and data sources:

1. UNFCCC-Clean Development Mechanism (CDM) website: UNEP-Risoe CDM Pipeline database
2. Climate Change, Carbon Markets And The CDM: A Call To Action: Report of the High-Level Panel on the CDM Policy Dialogue

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