Clean development mechanism basics

Clean Development
Mechanism Explained

EfficientCarbon

Carbon Credits

Carbon being traded as a commodity

Voluntary and binding agreements

CER and audited credits

So what really are Carbon Credits and what does Clean
Development Mechanism (CDM) mean?

To understand these, we need to first look at the Kyoto Protocol.

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The Kyoto Protocol
• A protocol to the United Nations Framework Convention on Climate
Change (UNFCCC or FCCC), aimed at fighting global warming.

• Sets binding targets for 37 industrialized countries and the European
community to reduce their Greenhouse Gas (GHG) emissions.

• Binding countries to meet their targets primarily through national markets

• Additional means of meeting targets through three market based
mechanisms:
– Emissions trading – known as “the carbon market"
– Joint implementation (JI) and
– Clean development mechanism (CDM)

• First two mechanisms relevant to Annex I / Annex II countries and the third
is relevant to developing countries.

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The Kyoto Protocol
• Parties to UNFCCC are classified as:
– Annex I countries - industrialized countries and economies in transition

– Annex II countries - developed countries which pay for costs of developing countries

– Developing countries like India.

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That brings us to CDM
• In simple terms, CDM is a GHG exchange program

• The theory is that atmosphere is equally polluted by
GHG‟s wherever they come from and equally benefits
from GHG cuts, wherever they come from.

• So in effect, if a company cannot control its pollution, it
can buy some amount of „clean credits‟ from someone
who has worked hard to cut down pollution – “Polluter
pays”.

• Hence you have companies bound to Kyoto protocol
buying carbon credits from organisations which invest in
developing clean development mechanism projects
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Companies pay cash

CLEAN DEVELOPMENT
MECHANISM

Organisations
Companies in developing CDM
Annex – I projects
countries

Organisations give certified carbon credits
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Certified Emission Reduction (CER)
• Primary unit of measurement of
the Carbon reduced by the
project

• Given by CDM executive board

• Certification that a project has
managed to reduce 1 tonne of
CO2 eq per year

• Approximate price of a single
CER ranges from $10 - $35
depending on the trading
exchange and market
conditions
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One of the key factors for approval of a CDM project is
the Additionality constraint.

Additionality
Emissions

Kyoto Protocol specifies that emission CER / Carbon
reductions are only to be certified under Credits

the Clean Development Mechanism (CDM)
if they are additional to any that would
occur in the absence of the certified
project activity.
Time
Project started

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Pre-Requisites of a CDM project
• Additionality constraint

• To be „Hosted‟ by a Non Annex-I country (like India) which meets some
basic constraints
– Adhere to UNFCCC conventions
– Establish a Designated National Authority

• Co-development by host country and an Annex-I country

• Validation by a Designated Operational Entity (DOE) and meeting the
CDM requirements

• Registration with the CDM Executive Board post review to ensure
compliance

• Verified and Certified by the DOE as resulting in real, additional,
verifiable and measurable emission reductions after commissioning of
operations.
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A CDM Project can be in many areas

Renewable
Clean Energy Energy Efficiency Construction
Energy

Waste Afforestation &
Transport Solvent Use
Management Green Cover

Agriculture HFC/PFC Rest/Others

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Before starting a CDM
project, a project baseline
has to be established. This is to establish the amount of
greenhouse gases that would have been
emitted without this CDM project.

Baseline Estimation Process

Identify Define Estimate Assess Monitor
Evaluate
sources baseline
Baseline for
the the uncertain Methodol-
Scenario baseline estimation -ties
estimation ogy

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So to summarise...
Establish Additionality

Establish Baseline

Verify Baseline

Get Approval from CDM Executive Board
(EB)

Kick off the CDM project activity

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The Actual CDM Activity
Project Stage Who does it? Activity Span Time Span

• Project Design Document Project Developers /
1 month Expenses
1 (PDD) Preparation Consultants

GOE / Ministry of
• Host Country Approval Environment and 6 months
2 Forests
One Time 12
Activity NA(depen
• Validation by DOEs DOE ds on to
3 project)
18
Up to 6
• Project Registration CDM EB months M
4
O
N
Project Developer T
• Monitoring Regular
5 and DOE H
S
Annual Up to 2
• Verification and Certification DOE and CDM EB Activity months
6

• Issue of CERs Up to 1.5 Project
CDM EB months
7 Monetised

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Costs in CDM Activity
• Project Development and Implementation costs

• Transaction Costs
– Consultant Fees

– Registration with Designated National Authority (DNA)

– Validation and Monitoring fee to Designated Operational
Authority (DOE)

– CER Issuance fee

– Contribution to UNFCCC adaptation fund
• 2% of the CERs will be deducted adaptation fund by CDM Executive Board.

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CDM Benefits to Annex-1 countries
• Reduction in overall emission mitigation costs

• Flexibility in meeting emission reduction
commitments

• Investment Opportunities

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CDM Benefits to Developing Countries
• Additional financing for sustainable development
projects in the country

• Technology transfer and development

• Mitigates local environment pollution

• Jobs and infrastructure development opportunities

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Risks and critiques
• Future beyond 2012 uncertain

• Meagre interest shown by the Govt in developing its
own CDM projects

• Proving additionality difficult in some cases

• Carbon credits being traded as financial instruments give
provision to misuse the intention behind CDM

• “Developed countries being let off by paying money to
clean up their footprint” – Wide opinions
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Sources
• http://cdm.unfccc.int/Projects/index.html

• http://cdm.unfccc.int/methodologies/PAmethodologies/tools/am-
tool-01-v5.2.pdf

• http://www.cdmcapacity.org

• http://ies.lbl.gov/iespubs/43418.pdf

• http://www.cdmindia.nic.in/

• http://unfccc.int/kyoto_protocol/items/2830.php

• http://www.cdmpakistan.gov.pk

• http://en.wikipedia.org/wiki/Clean_Development_Mechanism

• www.cdmrulebook.com
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CDM Facilitation
Project Initiation CDM Facilitation
• Project Evaluation • Baseline Studies

• Project Comparison • PDD Documentation

• Cost Analysis • Host Country Approval
Facilitation
• Financial Modeling – NPV, IRR
• Registration Facilitation
• CER Generating Potential
Analysis • Preparation of Monitoring
Report
• Project Technology Identification,
Analysis and Selection • Project Verification and CER
Issuance Facilitation
• Supplier Identification
• New Baseline Methodologies
• Creation of Full Project Plan Development

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Our Services
CARBON MANAGEMENT ADVISORY

SUSTAINABILITY CONSULTING

WATER MANAGEMENT

ENERGY EFFICIENCY

RENEWABLE ENERGY ADVISORY

CDM FACILITATION

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Contact us
Harsha: +91 9000345588
Pradeep: +91 9052224701
Office: +91 40 40128206



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Clean development mechanism basics

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