CDM Watch recently launched an online discussion forum to enable the public to participate in the CDM reform dialogue. The UN High-Level Panel on the CDM Policy Dialogue Panel is currently taking stock of the lessons learned in the CDM. CDM Watch’s Discussion Forum aims to foster open and constructive communication between civil society, policy makers and market participants.

Has the CDM achieved its goals? What changes do we need to create net benefits for climate and people? All views are welcome. Log in at: (forum.cdm-watch.org/) and leave a post, start new topics and discussions.

Pedro Martins Barata, former vice-chair of the CDM Executive Board officially launched the Discussion Forum in March. The event was attended by international CDM negotiators, NGOs and market participants.

Our new Discussion Forum facilitates dialogue between policy makers and civil society to learn from first hand experiences and encourage reform. The Forum is a unique place to debate positive and negative experiences with the CDM online. Critical and honest dialogue is needed to make sure mitigation tools work well and benefit the climate and people. What changes do we need to achieve these net benefits?

One month after launch, the discussion heated up when a former project developer posted his frank assessment of the realities on the ground (see box on the right). We print his challenging remarks here to encourage further discussion. On the discussion forum site market insiders, academics and NGOs have already responded and are sharing their views on the CDM’s performance.

The Forum’s aim is to contribute to the public dialogue on current CDM reform efforts, such as the CDM Policy Dialogue. The final report of the CDM Policy Dialogue is expected to be released in September 2012 and will include recommendations on several important topics, including the impact of the CDM on mitigation and sustainable development, governance and the role of the CDM in the future. We hope that the work of the panel will help to finally address shortcomings that so far have not been resolved due to political challenges or lack of clarity of the mandates. The recommendations for reform should address all relevant decision makers, including national governments, especially for issues that cannot be sufficiently addressed at UNFCCC level. Now is the time to think outside the box and tackle issues that have remained unresolved.

An insider’s view: fraud, corruption and environmental integrity of the CDM

By Roddy3

CDM in Asia and the widespread problem of corruption

I am a CDM and carbon professional that began working on CDM project development several years back. My firm has many projects (>30), mainly in Asian countries.

Asia is a region known for its rapid growth and insatiable demand for power. It is also well-known for pervasive corruption, fraud and criminal activity (see Corruption Perception Index rankings of top Asian economies
http://www.transparency.org/regional_pages/asia_pacific/resources/surveys_and_indices).

Before working actively on the development of CDM, I had strong suspicions about the veracity of claims to financial additionality in PDDs. How could almost every new hydro plant, biomass project or wind farm in India and China have an IRR conveniently below an already conservative investment benchmark?? Furthermore, given the CDM registration risk, carbon price risk and general project performance risks, would a rational investor seriously consider potential CDM revenue as the basis for proceeding with the project? It was all very fishy…

Not surprisingly, my suspicions were amply confirmed as soon as I began my new (tedious) job drafting PDDs and financial models. Almost every project I encountered was being been gamed or defrauded in some way in order to prove additionality.  Unorthodox financial engineering, false certificates, false board meeting minutes (a classic technique for “proving” prior consideration), redacted and re-edited feasibility studies, deliberate omission of material information (e.g. PPAs).

These were all tools of the trade if the original documents or numbers didn’t “fit” the rules. At times, when it got really bad we were told to turn a blind eye as our clients created the necessary evidence. We blamed the challenges we faced on the Executive Board (all those standards and guidelines!). Anything was OK so long as it helped achieve the ultimate goal: Registration and money for hot air. Nor was this in any way unique to my firm. After about six months working in-country and after attending numerous international conferences, I discovered that every other CDM developer appeared to be doing similar things.

There is plenty of hard and anecdotal evidence out there that support my position. CDM Project owners themselves admit that CERs are just a bonus to further line their pockets, as wikileaks conveniently revealed not long ago (http://www.cdm-watch.org/wordpress//var/www/vhosts/carbonmarketwatch.org/httpdocs/wp-content/uploads/2011/10/Press_Release_EBregistersIndianProjects.pdf). And it’s not just in India. I would go so far as to suggest that almost every CDM project with a significant income stream aside from CER revenues has defrauded and gamed this system in some way.

DOEs are complicit in these actions too, usually tacitly, careful to cover their tracks. They will give advice via telephone on “alternative approaches” and knowingly accept false documents. Unscrupulous host country validators are often the perpetrators here while technical reviewers sit, oblivious, in their German offices. Again, such behaviour is pervasive. I have known DOEs to openly accept soft bribes to overlook clear breaches of the rules.

Given the above it begs the question: why is there no global investigation taking place? Why is it up to tiny outfits like CDM Watch and International Rivers to level criticism? Where are the serious fraud offices and Interpol in all of this? A part of the answer, surely, is that UNFCCC Parties (i.e. governments) are complicit in the sham of the CDM.

In the developing world most host country DNAs (with the notable exception of Brazil) are nothing more than rubber stamp committees paying lip service to sustainable development. They are far more interested in the millions of dollars of spurious foreign direct investment their rubber stamps will generate. Developed countries are similarly self-interested; CDM massively lowers their cost of meeting GHG abatement targets, helping politicians stick to their bold pledges and appeasing large manufacturers. So it’s a wonderful win/win situation, isn’t it? The system isn’t broken, it just needs a little tweaking, it’s an immature market etc., etc.

This may sound like an extreme view but it is a carefully considered one, having worked directly and indirectly in carbon markets for nearly 7 years.

Many of you working for CDM consultancies will outwardly deny that fraud is so endemic. But I know for a fact that my experiences are the rule and NOT the exception. Many passionate young people like me that work(ed) for consultancies are disillusioned about the system in practice.  Unfortunately, many of them are scared to speak up because their hard-won jobs and livelihoods are at risk.  Others just leave the industry quietly or, given current CER prices, get fired. That is why open forums like this are important and I encourage others with similar experiences to speak out with their stories.

Which brings me back to my original point – in a region where corruption is pervasive and energy demand massively outstrips supply, the CDM is a gift. It is money for nothing and there are few repercussions if you get caught cheating the system. Your project may not get registered. Big deal.
So corruption and the terminally problematic concept of additionality mean the CDM will never function to produce real, measurable and verifiable emission reductions.  Instead it exacerbates climate change by providing a carte blanche to pollute. It is a “hollow market” and arguably worse than no CDM at all.

Recommendations
There are a few good CDM projects that genuinely need CER income and create a net environmental benefit (e.g. small scale biogas, efficient cook stoves, roof top solar). If these were the only projects allowed, we would see carbon prices at a much higher level, deeper abatement within Annex 1 countries and some genuine sustainable development benefits for low income households.

I therefore suggest to this forum and to the policy-makers that are probably not reading this that the CDM is massively scaled down; that it assists small scale projects where there is no significant revenue stream but the sale of carbon benefits.  Decision makers must also be very careful not to replicate the same mistakes with new market mechanisms (REDD+, sectoral CDM, NAMAs etc), no matter how attractive the economics and politics may seem.

I also ask for those in industry to take a cold, hard look at themselves, at the ethics of what they do and the long term consequences for the climate and for their children.

Any policemen reading this may also wish to take note.

I have now left the CDM business but am especially interested to hear the thoughts of those that remain.

Regards to all.

Roddy3