Carbon Market Watch

For fair and effective climate protection.

Current CDM projects are not fit for results based finance

25 Nov 2014

marathonThe future role of the Clean Development Mechanism (CDM) in the 2015 climate treaty is likely to be very limited. CDM advocates have therefore started to look beyond traditional funds for offsets and are now eyeing at climate finance. However, the CDM in its current state does not provide environmental and social standards needed for climate action.

From 2020, developing countries are also expected to contribute to the global mitigation efforts. This has a big impact on the original purpose of the CDM for a number of reasons (i) developed countries will have to have much higher domestic climate targets with limited demand for offsets (ii) developing countries will want to account for their own emission reductions (iii) emission reductions in developing countries will have to be financed in addition to climate action in developed countries.

The demand-supply imbalance caused by insufficient climate targets and lenient rules that have led to a large supply of offset credits have caused carbon offset prices to nose-dive. The vast majority of offset credits come from large energy projects that would also be viable without the additional CDM investment, hence not leading to real emission reductions. Experiences from local communities directly affected by CDM projects have shown that projects often do not live up to their sustainability promises and in some cases even have negative impacts, such as the displacement of communities, human rights violations and negative impacts on communities’ health and livelihoods.

Though interest by countries in the reform of the CDM will be negligible, negotiations in Lima will continue to discuss revisions of the CDM’s rules. These negotiations will be important because it is likely that the CDM rules will be recycled in some form in the 2015 climate treaty. For example, Brazil has suggested to establish an Enhanced Clean Development Mechanism (CDM+) on the basis of existing rules, entailing a new market mechanism, a new project based mechanism, and an option to account the voluntary cancellation of CDM carbon offsets towards financial pledges.

The notion of results based finance for CDM projects is not new. Given the dry demand for offset credits, also climate finance through the Green Climate Fund (GCF) is being considered. This should work by purchasing emission reductions from CDM projects without using the offset credits produced towards climate pledges. However, this concept disregards the fact that the GCF is mandated to channel ‘new, additional, adequate and predictable financial resources to developing countries.’ This notion should exclude the purchase of stranded offset credits that result from existing CDM projects. Moreover, numerous scientific studies highlight the lack of additionality for a large number of CDM projects which means that the amount of stranded offset credits that do not represent real emission reductions is potentially enormous.

Another reason why the GCF should shy away from CDM projects is enshrined in the GCF’s Interim environmental and social safeguards (ESS) which requires applicant entities to have the capacity and capability to undertake the assessment and management of environmental and social risks. Adopted safeguards foresee extensive stakeholder participation and a grievance mechanism. However, the CDM to date does not have safeguards or an established grievance mechanism in place.

Given the desire from some countries to use CDM rules in a future climate treaty, a fundamental reform of the CDM remains important and needs to address ample scientific evidence over the malfunctioning of its rules.

For detailed recommendations, see here.

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