Carbon Market Watch

For fair and effective climate protection.

Resuscitating the Clean Development Mechanism (Newsletter #2)

04 Mar 2013

Photo credit: photobucketDuring the 7th Conference of the Parties (COP-7) held in Marrakesh in 2001, Parties to the Kyoto Protocol decided to review the modalities and procedures of the Clean Development Mechanism (CDM) and  agree upon a revised set of rules at COP-19.

Although the political decisions taken at COP-18 in Doha ignored the severe quality concerns over the CDM and further undermined its environmental integrity, the CDM review at COP-19 could be a chance to address some inherent flaws of the CDM. If, however, its quality issues remain unaddressed, not only will the current over-supply of carbon offsets representing more than 4 gigatonnes (Gt) of CO2 continue to rise, but prices of these offsets will also dive below 1 EURO. It is political will that is making its mark right now. Countries don’t only need to set higher emission reduction targets; they also need to tackle the over-supply of offsets by addressing the quality problems of the CDM. Below is a summary of key issues we consider essential to be addressed as part of the review. For more details about these points, see here.

The CDM review at COP-19 could be a chance to address some inherent flaws of the CDM

Key issues to be addressed in the CDM review

Additionality: The demonstration of additionality – proof that projects are only viable because they receive CDM support – has long been criticised as ineffective. Research, recently released under the CDM Policy Dialogue, confirms that many of the large-scale power supply and methane projects are unlikely to be additional. If such projects remain eligible in the CDM, they could increase cumulative global greenhouse gas (GHG) emissions by up to 3.6Gtof carbon dioxide equivalent (CO2e) by 2020. Producing such non-additional credits also undermine the economic effectiveness of the CDM by artificially increasing the supply of credits that do not represent actual emission reductions. This is especially a problem since the CDM is already projected to be significantly oversupplied until 2020. A transition away from large-scale power supply CDM projects and other project types with low probability of additionality would address the over-supply of CDM credits, enable projects that truly depend on the CDM, and improve the overall environmental integrity and mitigation impact of the CDM.

Offsetting: The CDM is a zero sum game: it cannot deliver the large long-term emission cuts required to stay below 2 degrees of global warming. Especially in a future climate treaty, where both developed and developing countries are expected to have climate targets, the concept of pure offsetting is no longer appropriate. Instead the CDM must move beyond offsetting and be adapted to a scenario where multiple mechanisms exist. In order to preserve environmental integrity of offset credits, double counting of emission reductions must be avoided. The CDM must also make space for financing options with strict Measuring, Reporting and Verification (MRV) rules to help developing countries to reap low cost mitigation options for Nationally Appropriate Mitigation Actions (NAMAs) to develop on a low emissions pathway. Higher cost mitigation options should be addressed with other climate mitigation instruments, such as domestic policy instruments, for example using domestic emissions trading schemes.

Length of crediting periods: The current crediting periods are, in many cases, not appropriate because the lifetime of many technologies being used are shorter than the crediting periods currently available (10 years or three times 7 years). Another reason is that in many cases the CDM only advances an investment which would be carried out at a later stage anyhow. Such CDM projects should only receive credits for the number of years the projects’ implementation has been advanced.

Human rights: In 2011, the CDM Executive Board registered two projects despite evidence of human rights abuses in both cases. The Board argued that it has no mandate to address the issue of human rights and that the responsibility for ensuring sustainable development lies with the host country. However, numerous international human rights instruments are indeed relevant to the CDM Executive Board.  For example, the Decision 1/CP.16 stipulates that “Parties should in all climate change related actions fully respect human rights”. The review should clarify that international law, including the UN Charter, fundamentally requires the CDM Executive Board to set up relevant human rights standards and impose them on investors to ensure that CDM projects uphold human rights.

Sustainable development: The CDM has two main objectives: achieving cost-effective emission reductions and achieving sustainable development in the host countries. Experience has shown that the lack of monitoring, reporting, and verification of claimed sustainability benefits has led to the registration of CDM projects that have no contribution to sustainable development and sometimes even negative impacts. The CDM review should address these concerns by inter alia including provisions for monitoring, reporting, and verification of the environmental, social, and economic impacts of CDM activities and procedures for a grievance procedure.

Strengthened civil society participation in the CDM process: Although stakeholder consultation is a key requirement in the CDM registration process, project participants lack clear criteria or guidance on how to conduct and validate stakeholder consultations. In many cases, civil society, people and communities that are directly affected by CDM projects are not adequately informed about them and their potential on-the-ground impacts beforehand. In addition to shortcomings in these notices and comment processes, there is no means for civil society to raise concerns once a project is registered even if adverse impacts occur during project implementation. As more than 6.000 CDM projects are currently registered and will be operational for many years to come, the current procedure of stakeholder involvement in the CDM needs to be reassessed and improved, for example by introducing a CDM Ombudsman and a grievance mechanism.

Liability: Auditors are currently chosen and paid by a project’s developer. This can put pressure on auditors to approve projects and work quickly in order to preserve their business relationships with the developers. This compromises the auditors’ independence and neutrality. The review must address this conflict of interest, inter alia by developing rules and procedures under which auditors are assigned and paid by a UNFCCC body and where CDM project developers pay validation and verification fees to that body. In order to ensure that excess credits that are issued due to deficiencies such as fraud and corruption are compensated, the review should also established rules for dealing with significant deficiencies in validation, verification and certification reports.

Governance:  The way the CDM Executive Board is operating is often questionable. For example, other than maintaining regional balance there are no selection criteria for the nomination of members. Moreover, the nomination and election of CDM Executive members is not transparent and there is no explicit code of conduct that specifies what constitutes a conflict of interest. Since the composition of the Board directly impacts how CDM rules are developed and implemented, the review must address these issues inter alia by requiring a robust code of conduct, declare meetings of the CDM Executive Board open to the public, and by the set up a transparent nomination and selection process.