Clean Development Mechanism (CDM)
Currently largest active program (as of 1/2011).
Market Size and Scope
Offset Project Eligibility
Additionality Requirements and Project Methodologies
Project Approval Process
Type of Standard and Context
The Clean Development Mechanism (CDM) is a project-based GHG offset mechanism under the Kyoto Protocol. The scheme aims to assist Annex-I parties (industrialized countries with binding emission reduction targets) to cut global GHG emissions in a more cost-effective manner by allowing them to invest in offset projects in non-Annex I parties (developing countries without binding targets). The CDM also aims to assist non-Annex I parties achieve sustainable development, to contribute to the ultimate objective of the treaty, to stabilize GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system within a time-frame that allows ecosystems to adapt naturally, and to ensure that food production is not threatened and that economic development proceeds in a sustainable manner.
The parties to the United Nations Framework Convention on Climate Change (UNFCCC) negotiated and adopted the Kyoto Protocol in 1997. Initially, they only sketched out the basic features of the offset mechanism. In 2001, following a series of negotiations, the rules governing the operation of the mechanism were fleshed out in what are now known as the Marrakech Accords. The first CDM project was registered in 2004, and in the following year, after Russia’s ratification of the Protocol saw it enter into force, the first emission reduction credit was issued to a project. Since then, the scheme has grown rapidly and now dominates the offset market. Since September 2007, the CDM has self-financed its regulatory functions through fees charged to projects and no longer relies on grants from Annex-I countries.
For detailed information the CDM, see the CDM Rulebook.
Standard Authority and Administrative Bodies
The CDM Executive Board (EB) consists of 10 members and 10 alternate members representing different UN regions and interest groups under the Kyoto Protocol. The EB oversees the functioning of the CDM. The EB is ultimately accountable to the governing body of the Kyoto Protocol (COP-MOP), which includes representatives of all the countries that have ratified the treaty. The EB is supported by expert panels, which focuses on specific tasks:
The Accreditation Panel oversees the accreditation of designated operational entities or auditors.
The Methodologies Panel (Meth Panel) reviews the methodologies for setting the baseline for projects and monitoring them. The Meth Panel also considers revisions and improvement to the over 100 approved methodologies.
The Registration and Issuance Team (RIT) is responsible for reviewing requests for project registration and issuance.
Within each member country, a Designated National Authority (DNA) is required to issue letters of approval to projects confirming their voluntary participation in the CDM, and host countries must confirm that the activity assists the country to achieve sustainable development.
Designated Operational Entities (DOE) are UNFCCC-approved auditors who validate and verify CDM projects.
The scope of the CDM is international, involving all countries that have ratified the Kyoto Protocol.
Recognition of Other Standards/ Linkage with Other Trading Systems
Although the tradable units of other schemes cannot be used as CDM credits, several other compliance programs and voluntary standards either already recognize and accept Certified Emission Reduction (CERs) or plan to do so in the near future. Such schemes or standards include the EU ETS, the Regional Greenhouse Gas Initiative (RGGI), the Verified Carbon Standard (VCS) and Green-e. The Gold Standard certifies projects that use CDM methodologies and also comply with additional Gold Standard criteria.
Tradable Unit and Pricing Information
The tradable unit under the CDM is a Certified Emissions Reduction (CER). Each CER is equal to one metric ton of CO2e emissions abated.
Both public and private entities develop CDM projects and sell or buy the generated CERs to comply with their domestic or international emission reduction targets. Under the CDM, the project must be based in a non-Annex I (developing) country, but the project developers, CER buyers and other participants may be based in any country, provided they are authorized to participate in the project by the project host country’s DNA. Other parties involved in project development and the CER trade include intermediary buyers, such as private carbon trading firms (e.g. EcoSecurities, Tricorona Carbon Asset Management, EDF Trading, etc.) or public institutions (e.g. the World Bank). CERs can also be sold into the voluntary market. Buyers may also be from voluntary programs.
Current Project Portfolio
There were a total of over 5870 projects in the CDM pipeline in Feb. 2011, of those 2786 projects are registered and 942 CDM projects have issued CERs. Registered project are expected to deliver an annual average of 1959 million CERs. For up-to-date information, see UNEP Risoe Centre and UNFCCC CDM Statistics.
The distribution of CDM project types shown in Figure 3.2 shows the dominance of renewable energy projects. Of all CERs expected to be generated until 2012 renewable energy projects make up a third along with industrial gas projects, followed by methane projects, see Figure 3.1.
Figure 3.1 CERs expected until 2012 from CDM projects in each sector
Source: UNEP Risoe Centre 2011
Figure 3.2 Number (%) of CDM projects in each category of types
Source: UNEP Risoe Centre 2011
Figure 3.3 Total Expected CERs until 2012 by Project Type
Source: UNEP Risoe Centre 2011
Any project is eligible that reduces or avoids emissions of one of the six Kyoto GHGs below the level projected in the absence of the registered activity with the following exceptions:
• Nuclear energy projects are excluded under the Kyoto Protocol.
• New HCFC-22 facilities, avoided deforestation and carbon capture and storage are currently excluded but are still under debate.
Purchasing countries may impose additional unilateral project-specific restrictions on CERs. For example, the EU ETS does not currently allow the use of offsets generated from forestry projects. Also, buyers may put additional restrictions on hydropower projects to ensure that they meet the requirements of the World Commission on Dams.
A CDM project must be located in a non-Annex 1 country that has ratified or acceded to the Kyoto Protocol.
The updated small-scale project types are as follows:
- Type (i): renewable energy project activities with a maximum output capacity equivalent to up to 15 megawatts (or an appropriate equivalent);
- Type (ii): energy efficiency improvement project activities which reduce energy consumption, on the supply and/or demand side, by up to the equivalent of 60 gigawatt hours per year; and
- Type (iii): other project activities that both reduce anthropogenic emissions by sources and directly emit less than 60 kilotonnes of carbon dioxide equivalent annually.
Only projects that started on or after 1 January 2000 are eligible for consideration. The earliest possible start date for the crediting period is the start date of the project or the registration date of the project, whichever is later. If a project generated emission reductions before it was registered, then those emission reductions are not eligible to be issued as CERs. However, some of these ineligible emission reduction credits are being sold as VERs on the voluntary market (often called pre-registration credits). Similarly, some projects that have failed to qualify under the CDM are finding their way to the carbon market as VERs.
The crediting period for all CDM projects, except afforestation and reforestation projects, can be either:
• Seven years with the option of up to two renewals of seven years each if the project baseline is still valid or has been updated with new data; or
• 10 years with no renewal option.
For afforestation and reforestation projects, the choice is between:
• 20 years with up to two renewal periods of 20 years each; or
• 30 years with no renewal.
Co-benefit Objectives and Requirements
While there are no explicit guidelines for the environmental or social co-benefits of CDM projects, the Kyoto Protocol requires that CDM projects assist the host country in achieving sustainable development. The sustainable development criteria for evaluating CDM projects are accordingly set by each host country and may include social benefits such as improvements in the quality of life, alleviation of poverty and greater equity, as well as environmental benefits such as conservation of local resources, removing pressure on local environments, health benefits and compliance with domestic environmental policies. Some countries levy taxes on CDM activities that have no apparent direct sustainable development impacts in order to re-channel funds into activities that assist them with achieving sustainable development (e.g. China places a levy on several project types).
Each CDM project must demonstrate that the CDM was essential to bringing the project to fruition, or that in the absence of the CDM, the project would either not have gone ahead or have used an inferior technology, resulting in higher GHG emissions. Baseline methodologies incorporate these additionality requirements, which usually involve three of the four steps outlined in the “CDM Additionality Tool”:
1. Identifying alternatives: Identifying realistic and credible alternatives to the proposed project activity that are compliant with current laws and regulations;
2. Investment analysis: to determine that the proposed project activity is not the most economically or financially attractive;
3. Barrier analysis: Analysis of barriers that prevent the implementation of the proposed project activity or do not prevent the implementation of one of the alternatives;
4. Common practice analysis: Analyzes whether the proposed project activity is ‘commonly practiced’ by assessing the extent of diffusion of the proposed project activity.
Steps 1 and 4 are required for all projects, whereas project developers have a choice of fulfilling either step 2 or step 3 to fulfill the additionality requirement. It is important that the Additionality tool is not compulsory unless specified in a methodology.
The CDM uses a bottom-up approach. Project developers propose new methodologies and once these methodologies are reviewed and approved, they can be used to approve other projects of the same type. New methodologies are first reviewed by a Designated Operational Entity (DOE), an independent CDM-accredited auditor, on behalf of a project developer. The methodology is then reviewed and assessed by the CDM Methodology Panel, incorporating expert input and public comments. Finally, it is approved or rejected by the CDM EB.
Existing methodologies have been amended and refined over time as new projects have been proposed and approved with amendments to existing methodologies. Furthermore, similar methodologies for certain types of project, such as landfill gas projects or grid-connected renewable energy electricity projects, have been consolidated into single methodologies to make them applicable to a broad range of projects. The CDM EB has issued tools that developers can draw on to address common methodological features when proposing new methodologies.
The baseline methodologies for afforestation and reforestation projects must account for leakage by including information on the sources of leakage and how they will be accounted for. The information submitted must specify the relevant leakage calculations, indicate how the values will be obtained and describe the uncertainties associated with key parameters. Furthermore, if some leakage sources are not accounted for, the Project Design Document (PDD) must explain why these sources were excluded. The requirement for addressing leakage applies to other project categories also but is most relevant for LULUCF project. International leakage and market shifting do not need to be accounted for.
The risk of carbon being re-released into the atmosphere by forest destruction is addressed by requiring forestry CDM projects to produce temporary emissions credits referred to as either “temporary CERs” (tCERs) or “long-term CERs” (lCERs). Both types of CER have expiration dates, after which they must be replaced by another tradable emissions unit under the Kyoto Protocol. The tCERs and lCERs may be cancelled if verification reveals that the stored carbon for which they were issued was released back into the atmosphere. On cancellation, they must be replaced by another Kyoto Protocol emissions trading unit.
Validation and Registration
The validation and registration processes for project developers involve several steps. It starts with the preparation of a PDD detailing the project activities, the baseline methodology used to quantify the emission reduction, the monitoring process and information relating to the local stakeholder process that the project proponent conducts. The document is then made publicly available for comment. The PDD and the public comments are then reviewed by a CDM-approved auditor (a DOE). This may involve visits to the project site and consultations with the local stakeholder. Once the review is complete, the DOE prepares a Validation Report confirming that the project is a valid CDM project.
Prior to registration, the CDM Designated National Authority (DNA) in the country hosting the project needs to provide a letter of approval. The DNA will issue such a letter confirming its approval of the project if the project meets the host country’s sustainable development criteria, complies with the country’s laws and regulations and fulfills any other requirement specified by the DNA. In some countries the validation report referred to above is a prerequisite for the host country to assess the activity.
Following host nation approval, all of the documents are then submitted to the CDM EB for registration and made publicly available. The project is registered if, within an eight-week period (fewer for small-scale projects), there are no objections from either the member countries involved in the project or three or more EB members.
Monitoring, Verification and Certification
Once the project is operational, the project must be monitored periodically in accordance with the monitoring plan. A Monitoring Report has to be prepared recording the CERs generated, which is made public at the start of the DOE assessment process. Once again, the DOE must verify this report, and based on its assessment prepare a Verification Report and a Certification Report, confirming the emission reductions achieved. The same auditor who validates the project cannot serve as the verifier except in the case of small-scale projects.
The Monitoring, Verification and Certification Reports are submitted to the CDM EB requesting the issuance of CERs for the amount of emission reduction achieved and verified. The Registration and Issuance Team assists the EB in the review process. As with the registration process, the request for issuance will be executed after 15 days unless a member country involved in the project or at least three members of the EB request a review of the project during this period.
Registries and Fees
The CDM Registry is administered by the UNFCCC secretariat. On instruction by the EB to issue CERs for a project activity, the secretariat forwards the issued CERs to the relevant Holding Accounts. Project participants may have a Holding Account in either the CDM Registry or the National Registry of an Annex-1 country.
For the CERs to be transferred from the CDM Registry account to a National Registry account, they must pass through the International Transaction Log (ITL). The first transfers to the New Zealand, Swiss, and Japanese registries have been completed. The ITL will record transactions of CERs from the CDM registries to the Annex I National Registries. Once the CERs are received in a National Registry account they can either be traded or used for compliance with national targets or regional targets, as is the case with the EU, by retiring the CERs within the registries. At present, CERs cannot be transferred between National Registries, but internal transfers within a National Registry are possible.
The CDM fee structure is as follows:
• A fee of USD 1,000 is charged for a new methodology submission, which, if the methodology is approved or consolidated, is considered as a down payment on the registration fee.
• A registration fee, a down payment accounted for at the time of the first issuance, of USD 0.10 per CER is charged for the first 15,000 CERs issued in a given calendar year A charge of USD 0.20 per CER is made for every additional CER issued up to an upper limit, which is set at USD 350,000. No registration fee is charged if the average annual emissions over the crediting period amount to less than 15,000 tCO2e. If the project is not registered, then any amount above USD 30,000 is reimbursed to the project developer. Project activities located in the least developed countries (LDCs) do not have to pay a registration fee or a share of the proceeds.
• An issuance fee of 2% of the CERs from each issuance is charged to cover administrative expenses and adaptation costs.