Carbon Market Watch

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CDM Watch Summary of the European Commission Study on the Integrity of the Clean Development Mechanism

23 Feb 2012

PDF (English)

Executive Summary

In December 2011, the European Commission published the “Study on the integrity of the Clean Development Mechanism”[1]. Under European Commission contract, this study was carried out by AEA, the Stockholm Environment Institute (SEI), the Centre for European Policy Studies (CEPS) and CO2logic. The study consists of one final report presenting the findings of seven accompanying briefing papers. The objectives of this study were to develop an in-depth understanding on the current CDM system (its merits and shortcomings) and options for reform as well as potential alternative mechanisms and their impacts. In particular the study aims to:

  • Assess merits and shortcomings of the CDM as it currently stands;
  • Recommend action at UN (supply-side) and EU (demand-side) level to further improve governance, effectiveness, efficiency, regional distribution and contribution to sustainable development and technology transfer of the CDM, and drive a transition away from project-based crediting in advanced Developing Countries (DCs) towards sectoral mechanisms and global policies
  • Provide a practical focus on large hydro and energy intensive sector (e.g. steel, cement, and aluminium) projects, including the evidence base relating to alleged concerns about additionality, competitiveness and carbon leakage and options for applying use restrictions under Article 11.a(9) of the EU ETS directive, and;
  • Provide a scoping study on JI track 1 projects, including a review of additionality issues.

It is noteworthy, that the study summarises the merits of the CDM in five bullet points while allotting five entire pages to its shortcomings. Similarly, it adds a long list of both, supply-side and demand-side options. It provides three general reform options to address concerns about non-additionality and sustainability impacts: it identifies standardized baselines and additionality testing as a supply-side reform option and assesses discount factors and negative lists from a demand-side perspective. The study also assesses how new mechanisms (such as sectoral crediting mechanisms) can address identified shortcomings and scale up emissions reductions.

The study focuses particularly on hydro power projects reviewing the arguments related to concerns about additionality and sustainability of hydro power projects and assesses possible reform options. In order to explore the practical aspects relating to the use of negative lists, including the arguments for and against additionality testing and sustainability impacts, the study assessed specifically demand side reform measures for the hydro power sector. Due to increased public scrutiny of hydro projects within the CDM, the focus on hydro power should also provide an example and make the analysis relevant to the current debate. Key recommendations provided in the study include:

1. Standardisation of baseline and additionality determination:

  • Sponsor methodology development efforts on project types of particular relevance to EU objectives (LDCs);
  • Identify and partner with DNAs that share similar perspectives on national and regional circumstances and submit developed methodologies;
  • Support data development efforts relevant to benchmarks and baselines for sectoral crediting mechanisms (SCM);
  • Develop proposals and provide support for administrative systems to review and approve standardised approaches, especially those submitted by DNAs; and
  • Balance the development and promotion of innovative baseline and additionality mechanisms while limiting the scale of risk to environmental integrity. For example, by setting a gradual cap to the total number of CERs to be issued in order to avoid and assess if any unexpected consequences happen.

2. CDM reform options with focus on hydro power projects:

  • Further analysis needed of market implication and alternative mechanisms or financial accelerators to see how truly additional hydro projects in LDCs and middle income countries can be supported. Based on this, a ban can be introduced to restrict large hydro projects from all countries except LDCs;
  • Size and criteria for defining large hydro projects needs to be reconsidered for an aggregated negative list option;
  • Political feasibility possible if parallel proposals for alternative mechanisms and financial accelerators support the hydro sector in developing countries;
  • Market acceptability of this option will remain low under any circumstances due to unavoidable lost rent opportunities for big investors;
  • Continue to pursue further clarity on the definition of sustainability within the CDM validation and registration process;
  • Continue to improve the guidelines for additionality testing and the development of alternative methodologies (e.g. standardised baselines and additionality tests);
  • Develop options for ex-post validation of sustainable development at project level, and the role of DNAs, DOEs and the EB in this process. Consider proposals for including the introduction of harm assessments as proposed by CDM Watch;
  • Continue to engage with the EU Member States in understanding the practicalities of using the WCD guidelines and the causes of any delays in the approval process for the use of hydro power project CERs in the EU ETS;
  • Continue to engage with IHA on the potential for improved stakeholder participation in refining the HSAP and for assessing the comparative advantage and disadvantage of using the HSAP over the current harmonised guidelines for approving CDM hydro power project CERs from the demand side.
  • Develop approaches for minimum thresholds for sustainability;
  • Engage with DNAs to develop measures to further support the assessment of sustainability, including guidance and tools; and
  • Work closely with Member States towards full adoption of harmonised guidelines and templates for assessment of compliance with Article 11b (6) of the Linking Directive.

3. New market mechanisms

  • To gradually set rules for setting crediting baselines;
  • Continue to develop capacity for Monitoring, reporting and verification (MRV);
  • Collect data, develop transparent and consistent methodologies for data processing; build upon the CDM and past and existing initiatives;
  • Start developing a blueprint for governance and institutional options to be discussed and brought forward bilaterally or within UN negotiations, and more generally;
  • Identify capacity building needs consistent with the challenges outlined above;
  • Accompany the proposal for a SCM with technology support policies;
  • And where appropriate restrictions of the CDM.

[1] http://ec.europa.eu/clima/policies/ets/linking/studies_en.htm