Introduction
The
Clean Development Mechanism is one of the instruments
created by the Kyoto Protocol to facilitate carbon
trading. It is the first of the flexible mechanisms to come into
effect, with the launch of the regulatory body, the CDM Executive
Board in late 2002, and the approval and registration of the first
project, based in Brazil, in late 2004.
Hailed as
the "Kyoto surprise", the CDM enjoyed unexpected
support from developing countries, and was the compromise solution
between Brazil's proposed creation of an adaptation fund for
climate-vulnerable countries – the Clean Development Fund – and the
USA's demand for a market mechanism similar to the Joint
Implementation scheme, but with developing countries.
Key to the
support was the CDM's explicitly stated twin
objectives of not only emissions reductions for
industrialized countries, but also accelerated sustainable
development in developing nations. These twin goals are emphasized
in the Marrakech Accords, which reiterate that a key feature of the
CDM should be the successful transfer of
environmentally safe technology and knowledge.
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What is
the Clean Development Mechanisms?
The
Clean Development Mechanism may be described as having
several roles. It enables industrialized Parties with
emissions reductions commitments to efficiently reach their
targets, in an economically efficient way. The incentive to invest
in projects is created by the different costs of carbon abatement –
an industrialized country seeking to reduce emissions
domestically is likely to face substantially higher costs, compared
to investment in Clean Development Mechanism
projects to abate emissions overseas.
By providing
investment incentives, the Clean Development Mechanism
acts as an aid to project finance in host countries, encouraging
sustainable development through the adoption of cleaner energy
sources, or more efficient industrial processes. Host countries
which tax the revenue from local projects, as is the case in China,
will also be able to build a national fund which may be used for
local adaptation to climate change.
The
Clean Development Mechanism is a project-based financing
mechanism, whereby eligible
Annex 1 Parties may purchase carbon credits generated by
projects hosted in developing
non-Annex 1 countries. Such Annex 1 Parties may be purchasing
carbon credits to fulfill compliance requirements, or for
speculation, as is the case for US companies.
Projects
hosted in non-Annex 1 countries, such as Asia, South Africa and
South America, may be developed unilaterally, or bilaterally with
investment or support from companies and Governments in Annex 1
countries, as long as the project helps the host country meet its
own goals for sustainable development, and does not divert Overseas
Development Aid away from the country. Although the first
'Commitment Period' of the Kyoto Protocol does not start until 2008,
under the Clean Development Mechanism, projects can
generate emission credits known as Certified Emission Reductions
(CERs) from 2000 onwards.
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Who are
the Key CDM parties?
CDM
Executive Board
The
CDM is regulated and overseen by the Executive Board, which
was established by the Marrakesh Accords during the 7thConference
of the Parties. It comprises 10 board members, with 10 alternates,
from industrialized countries with emissions reductions
commitments (Annex
B) as well as non-Annex B countries.
Members
serve on the board for a term of two years (maximum of two
consecutive terms), with the chair and vice-chair elected by the
Executive Board, with one being a member from an Annex B Party and
one being a member from a non-Annex B Party. The chair and
vice-chair alternate annually between members from Annex B and
non-Annex B Parties respectively.
To assist in
carrying out its responsibilities, the Executive Board may establish
panels or working groups. There are currently five Panels/groups:
The
long-term future of the Clean Development Mechanism
is guided by the proceedings of the Conference of Parties, held
yearly since 1995 and comprising of delegates from all countries
which are Parties to the UNFCCC. Since the entry into force of the
Kyoto Protocol in Feb 2005, another annual event,
combined with the COP, is the Meeting of the Parties to the
Kyoto Protocol. The first COP/MOP was held in Montreal in
Dec 2005, and the second COP/MOP2 was held in Nairobi, Kenya in Nov
2006.
Designated
National Authorities (DNA)
At a
national level, each country involved in the CDM
has a
Designated National Authority (DNA) responsible for granting
approval to local projects which have fulfilled national criteria
for sustainable development and with a good chance of succeeding at
eventual registration, as well as acting as a focal point for
CDM activities. The UNFCCC maintains
a list of DNAs and contact persons, and most DNAs will have
dedicated websites and online resources.
It is a
requirement for parties who have ratified the Kyoto Protocol to
specify a DNA – Buyers will require approval from the DNA of the
industrialized country where they have commercial operations in,
while Sellers will require approval from host country DNAs. If you have
a specific interest in a particular country, please
contact us for more
information on approval processes, updated DNA contacts or general
queries.
Designated
Operating Entities (DOE)
These are
third-party independent parties which act as "auditors" for the
CDM project. These companies have to be certified
by the CDM Executive Board as
Designated Operating Entities (DOE) , before they are able to
provide this service to project owners. DOEs are responsible for
checking and validating the
Project Design Document (PDD); this is a technical document
which fully describes the CDM project.
Private
parties
On the
sell-side, these include project owners based in host countries –
these are typically entities which own the assets which may be
developed into CDM projects e.g. farms, chemical
factories, steel plants, cement plants, or state-owned energy
companies seeking to develop alternative power generation sources.
Project owners may also be the project developers if the CDM
activity is related to their core industries – however, there is a
growing market here for environmental/technical consultants which
advise on implementation, compile the required project
documentation, and which manage the bulk of the CDM process. DNAs
will typically have a list of recommended consultants which
undertake this work locally.
On the
buy-side, there are many different types of buyers ranging from
public and private utilities, oil companies, investment banks,
government programmes and institutional and private hedge funds.
While some Buyers approach Sellers directly, others prefer to
operate through brokers. Sellers are also likely to be able to
access a much wider market of interested buyers through using a
CER broker.
Please
contact us if you
would like to find out more about our financial CER
brokerage services.
NGOs
Non-governmental organizations such as the WWF, CDM Watch, and many
local non-profit organizations play an important role in promoting
and raising awareness of the sustainability of CDM
projects. This may be through monitoring listed CDM projects,
participating in local and international stakeholder consultations,
or taking an active role in project development. Key issues
highlighted by these organizations include the potential impacts of
palm oil biomass projects on deforestation, large hydropower on
village displacement, and low-quality project documents which do not
adequately address local concerns and views.
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