Carbon Market Watch

For fair and effective climate protection.

Boosting CDM projects in LDCs: An introduction to suppressed demand (Newsletter #16)

11 Sep 2011

The very poor have such small carbon footprints that it is difficult to implement CDM projects that target them, since there are practically no emissions to reduce. The concept of ‘suppressed demand’ tries to take into account the fact that emissions would be much higher if the poor had access to energy and goods. Is it possible to take into account ‘suppressed demand’ in a way that adequately address both of the CDM’s mandates of delivering mitigation and development benefits? The CDM Executive Board will discuss how to address suppressed demand at its next meeting. We provide you with an introduction to this complex topic.

The EU has restricted the credits that can be sold in the European Union Emissions Trading System (EU-ETS). Projects that register after 2012 have to be located in LDCs in order to be able to sell their credits. This is to promote CDM projects in poor areas. But are such CDM projects for the poorest really viable? Currently, this is difficult and here is why:

About 12% of the world population lives in Least Developed Countries (LDCs). But they account for less than 5% of global greenhouse gas (GHG) emissions. Per capita emissions are a negligible 0.2 tonnes (it’s about 12 tonnes in Europe).   People in LDCs are simply too poor to use much energy or consumer goods:

Imagine a poor rural village without access to electricity. The slightly more affluent households may use car batteries they charge with diesel generators to power a fan, a radio and a TV, and use a couple of Kerosene lamps for a bit of light at night. But the majority of people in the village just don’t use light (other than from a wood fire) or electricity.

Then a CDM project developer proposes to electrify the village by installing solar panels or wind turbines. The challenge is how to calculate emissions reductions from such a project, given that before the project, there were really almost no GHG emissions, except for the few car batteries and kerosene lamps.

Normally a CDM calculates its emissions reductions (and the credits it receives) by calculating the “before the project” emissions (baseline emissions) and then subtracting “after the project” emissions (project emissions). In the case of a renewable energy projects, project emissions  would be zero. Yet if the “before the project” emissions are almost zero, such a project does not earn carbon credits under the current CDM rules.

This is where the concept of “suppressed demand” comes in. Suppressed demand expresses the fact that poor people tend to consume less (energy, water, goods) than they would if they were less poor, or if the services to which they had access were cheaper. CDM projects for the very poor are not viable, if we take the ‘before the project’ GHG emissions as the baseline. If suppressed demand is taken into account the baseline takes into account how much the emissions would be or will be once the village gets wealthier or gets access to other technologies or energy sources. Such projects that take into account suppressed demand therefore do not reduce existing emissions but ideally avoid future emissions by providing an incentive for a cleaner development pathway. To think about the issue more, it is helpful to make the following distinction between the type of emissions reductions:

  • “Real and measurable” emissions reductions: The CDM project replaces an activity with higher emissions: e.g. new higher-efficiency gas boiler replaces an old inefficient gasoline boiler. The baseline is based on the ‘before project’ emissions, e.g. when the old boiler was still in place. Assuming such CDM projects are additional, they result in actual emissions reductions.
  • Avoided emissions: A solar panel CDM project is implemented in a poor rural village with no access to the electricity grid. Very likely over the next 10 years, the number of kerosene pressure lamps and car batteries would have grown considerably, and some households might even have bought a generator.  The solar panels in the project will deliver light and electricity and therefore avoid the increase in emissions that would have occurred. In this example, a realistic and reasonable suppressed demand baseline is set based on how much light and electricity and what type of technology the village would have used if it was not that poor. (At this point we are just explaining the concept and do not elaborate on how such a ‘reasonable’ baseline is established… this is of course where the challenge lies). Assuming such CDM projects are additional, they result in avoided future emissions.
  • Fictitious emissions reductions: The same solar panel CDM project is implemented in a poor rural village with no access to the electricity grid. This time the baseline assumes that without the CDM project each household would have over time gotten 200 kerosene hurricane lamps (the equivalent of light that they have available with the PV panels). This is unrealistic and not physically possible. If people can afford to buy 200 kerosene hurricane lamps, they will switch to a technology that is more efficient at delivering light – in this case a kerosene pressure lamp. Using kerosene hurricane lamps, therefore, as the suppressed demand baseline is non-conservative and clearly undermines mitigation goals. In this case, the CDM project does not result in actual or avoided emissions reductions because the assumed suppressed demand baseline emissions are unrealistic or inflated.

To distinguish between these three types of emissions reductions is easy in theory and quite difficult in practice. Suppressed demand approaches should lead to avoided emissions reductions. Fictitious emissions reductions have to be minimized, otherwise climate mitigation goals are compromised.

In theory, and according to CDM rules, only projects that result in ‘real and measurable’ emissions reductions should earn credits. However, this fundamental principle is not applied in practice: most renewable energy CDM projects actually do not result in ‘real and measurable’ emissions reductions but rather are credited for avoid emissions. An example: in most countries, no coal power plant is shut down because a wind farm comes on-line. In fact, the coal plant may not even run any fewer hours. Because electricity demand is continuously growing, the wind farm will satisfy growing demand and therefore potentially help avoid new fossil fuel plants being built, but it is unlikely to replace existing capacity or result in absolute emissions reductions below historical levels. In other words, crediting ‘avoided emissions reductions’ is already common practice under the CDM.

Therefore, it seems unfair to accept such avoided emissions reductions which arguably benefit the wealthier (who have access to the grid) and refuse to address the issue for projects that target the poorest. If the issue is not addressed explicitly, this may perpetuate an implicit unfair approach to suppressed demand that may prevent projects that would benefit the poorest.

Everybody would like to see poor communities to leapfrog to clean development instead of first using dirty technologies. In our example, this would mean, instead of more and more households getting diesel generators, the village would be electrified with renewable power.  Taking into account suppressed demand for CDM projects that target the very poor may be a catalyst for such green leapfrogging.

On the other hand. suppressed demand baselines that assume emissions that are substantially higher than actual historical emissions risk to substantially undermine the mitigation goals of the CDM. Suppressed demand approaches have to adequately address both of the CDM’s mandates of delivering mitigation and development benefits. At the same time they must not replace or inhibit other ongoing development efforts. This is a tall order and requires careful consideration and research.

At its last meeting the CDM Executive Board approved a draft standard on how to address suppressed demand in the CDM more systematically. At the upcoming meeting the Board will continue their work on this issue and discuss a draft work programme, prepared by the Secretariat, to further improve and implement the guidelines. CDM Watch welcomes many of the recommendations in the work programme. However, as with most real-world issues: it gets complicated quickly and there are no easy answers. It is therefore especially important to carefully consider this important issue and to include input from relevant stakeholders when developing suppressed demand guidelines and methodologies.

CDM Watch recommends:

  • Approaches to suppressed demand need to preserve the CDM’s mitigation goals. Not every good development project can be a good CDM project. Project types that neither reduce nor clearly avoid emissions reductions do not belong in the CDM.
  • The CDM must not create perverse incentives that undermine development policies and activities.
  • The topic of how to resolve the tension between development and mitigation is complex and the devil lies in the details. We welcome the approved note as a good first step, yet many of the details still need to be researched and defined more carefully.
  • The impacts of different levels of taking into account suppressed demand need to be modeled so that mitigation and development goals can be balanced.
  • A working group that includes technical experts and NGOs should be established to further address this issue.