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