Reforming the CDM to Expand Emissions Reduction

By Aedan Kernan, Greenwell Consulting
May 2012

The Clean Development Mechanism (CDM) that emerged as part of the Kyoto Protocol has generated both praise and criticism for its ability to reduce carbon emissions. Efforts to expand upon the CDM may come in the form of nationally appropriate mitigation action (NAMA) plans that are expected to comprise a key element in any future international climate protection regime. Combining NAMAs and CDM has the potential to deliver cost-effective emissions reduction with a measurable commitment from developed and developing countries.

illustration of industrialized area with smokestacks

The CDM was designed to allow parties to the Kyoto agreement to meet emissions reductions targets by engaging in emission reduction projects in developing countries that procure a Certified Emissions Reduction certificates (CER). By late 2010, the CDM had generated certificates for 450 million tonnes of CO2 emission reductions and enabled the investment of billions of Euros in emission reduction projects in developing countries.

"If you really look at the numbers and the leverage that CDM and carbon credits have had, it is probably the most successful public-private partnership operation that we have ever seen," says Ingo Pohl a Thailand-based consultant with South Pole Carbon Asset Management.

Yet Pohl acknowledges that the CDM would benefit from reform. Pohl says, "A purely project-based approach is not enough. It is complete cherry picking, carrot without stick."

Movement Toward CDM Reform

Christiana Figueres, Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC), and others have been pushing the need for CDM reform. The project-by-project process for registering and verifying CDM projects involves high costs, long times to market, and considerable risk that the project won’t be accepted for registration. High transaction costs are a disproportionate inhibiter for small-scale projects that might provide benefits to the poorest.

Efforts to reduce transaction costs and to group micro projects so as to utilize the CDM process launched the concept of CDM Programs of Activities (PoA). A government agency, NGO, or business can establish a PoA with broad parameters for a particular industry sector or type of activity. PoAs have more flexibility in that they do not need to define the scale and location of each CDM projects.

Another criticism of CDM is that some projects, such as coal plant efficiency schemes, are viewed as investments in emission creation rather than reduction. In some cases, the project-based nature of CDM does not lead to overall reductions in developing countries’ emissions and can even discourage developing countries from implementing a regulatory approach to emission reductions.

Despite the criticisms, CDMs often deliver environmental benefits. Pohl says, "In Thailand only 5% of the projected CERs were actually delivered. But the projects that were hoping to get carbon credits were built. They are operating and delivering environmental benefits."

Revised Mitigation Commitments

The concept of NAMAs first emerged at the 2007 Bali climate change conference as a way for developing countries to make a policy commitment against rises in greenhouse gases. Today, many developing countries, including China, India, South Africa, Mexico and Brazil, have published NAMAs that have the potential to reduce emissions by 20% compared to business-as-usual.

Because NAMA is an evolving concept, there is no agreement on a definition. Some NAMAs set national targets and detail how they mean to achieve them, some list mitigation options, while others set out a broad commitment without supporting detail.

Despite the lack of clarity surrounding NAMAs, the concept is expected to form a key element in whatever climate regime follows the end of the Kyoto arrangements in 2012. It is not clear whether the design for NAMAs will build on the CDM or seek to establish a completely new market mechanism. Experts like Pohl hope that the design of NAMAs will build on the CDM, and not replace it, because it has taken years to institutionalize the CDM.

Linking NAMAs to Individual CDM Projects

KfW, a German government-owned development bank, has commissioned South Pole Carbon to design and test NAMA pilot projects. The NAMA commitments will be linked down to identifiable CDM projects, using PoAs as bridging tools with the NAMA.

Developing countries are incentivized to participate because they will receive international help toward delivering their emission-reduction commitments. In Thailand, Pohl and his colleagues have calculated that the PoA approach could cover more than 30% of the costs that are currently subsidized by the country’s renewable energy feed-in tariffs.

Linking measurable emission reduction commitments to CDM projects promises to actively engage developing countries in the emission reduction process. Those countries would become consumers of CERs rather than just sellers. Says Pohl, "Developing countries could become a key driving force for demand – saving the carbon markets."