Recent Developments in the Clean Development Mechanism
Relevance for policy makers in developing countries

By: Heleen De Coninck, ECN, The Netherlands

Introduction

The commitment of most industrialised countries to reduce worldwide greenhouse gas emissions led to agreement on the Kyoto Protocol during the third Conference of Parties to the United Nations Framework Convention on Climate Change, in 1997. Once entered into force (after the pending ratification of the Russian Federation), the Kyoto Protocol obliges ratifying industrialised countries to reduce their emissions relative to a reference year, usually 1990. These countries can do this domestically, but can also decide to purchase CO2 emission reductions from abroad. If this is done in the so-called non-Annex I (mainly developing) countries, they will have to use the Clean Development Mechanism (CDM). All ASEAN countries are non-Annex-I countries and therefore potential host countries for such greenhouse gas reducing projects.

CDM: not a panacea

CDM can be beneficial for developing countries. Direct benefits could comprise of an increased flow of investment, transfer of environmentally benign technologies and a contribution to sustainable development in the non-Annex-I country. Associated benefits can vary depending on the circumstances. The projects may well lead to enhanced local economic development, to reduction of local air pollutants, and to capacity building among the local workers and enterprises.

However, CDM is not a panacea. Carefully designing the projects in order to attract real direct foreign investment is a task of the host country. Attracting investments that really facilitate technology or knowledge transfer does not go without saying. Most projects that are currently submitted to the CDM Executive Board for approval are implementing technologies that are well known in the host countries. Moreover, the project developer is often a local energy company, in stead of a foreign project developer, who would bring new technologies to the country. In many cases, also the extra cash flow is only the cash flow of the CDM credits. The host country can determine the requirements for contributions to sustainable development of the CDM project and can in this way influence the type of projects executed in the country.

Institutional structure and capacity building

The first requirement for a country to host a CDM project is the accession or ratification of the Kyoto Protocol. In Table 1, the countries that have done so are listed. It is remarkable that several countries with a large potential in green independent power producers (and therefore possibly for CDM projects) have not yet finished the ratification process.

In order to implement only the most beneficial and in climate mitigation terms the most effective projects, a strong institution in the host country is essential. During the past years, in many countries, extensive capacity building programmes have been executed to achieve a higher degree of awareness and experience with flexible mechanisms. Several programmes have been implemented in Southeast Asia. For instance, the Japanese Ministry of Foreign Affairs has a programme in place for Asia, including the countries Indonesia, the Philippines, Malaysia, Thailand and Vietnam. The Asian Development Bank has been active, the Norwegian, Dutch and Danish governments have invested in capacity for CDM in several countries, including Southeast Asia, and the UNEP Energy Unit is funding CDM capacity building activities in Cambodia, the Philippines and Vietnam. The EU has been funding projects under its Fifth Framework Programme, and the World Bank�s Prototype Carbon Fund has an associated capacity building programme with workshops, and manuals, which are available on its Internet site.

These programmes undoubtedly contribute to the likeliness of CDM projects in the country, even though not all programmes are focussed on establishing an improved institutional structure. Some programmes aim at the full establishment of a CDM unit in the relevant ministry of the host country, others don�t go beyond organising a workshop aimed at raising awareness in government and the private sector.

Requirements for the host country

Apart from ratifying the Kyoto Protocol, a host country is much helped by having a CDM unit in place. This unit can contact potential investors and can co-ordinate which projects are preferred. It can also establish the sustainability requirements that are determined by the host country and can inform project developers and stakeholders on the opportunities in CDM. This unit could also give advice to the project developer on the additionality and baseline methodology criteria that the CDM Executive Board has established.

Requirements for the host country from the UNFCCC are limited to the appointing of a Designated National Authority registered with the UNFCCC*. Of the Southeast Asian countries, only Malaysia has registered a DNA, at its Ministry of Science, Technology and the Environment. In addition, the programmes usually have their own requirements. A Memorandum of Understanding (MoU) with the buying country or the purchasing programme is common practice, and Letters of Endorsement (from host country to PCF) or Letters of Project Approval (from host country to project entity) are usually required to legally formalise the agreement.

Revenues from CDM

The revenues of CDM are highly dependent on the type of project and the location. Obviously, if the revenues from Certified Emission Reductions (CERs) contribute much to the total investment costs, the project type becomes more attractive for application for CERs. As is demonstrated in Table 2, this is particularly the case for fuel switch and gas capture projects.

As can be concluded from Figure 1, the number of projects in gas capture and fuel switch is not large, but the emission reduction (and therefore the revenues from CERs) is relatively big. The financial attractiveness of certain technologies under CDM is not the only incentive to implement a project. Barriers that apply to relatively new technologies (such as in some energy efficiency measures) also determine the number of projects implemented. Relatively well developed technologies, such as wind and hydro energy, succeed in contracting a large number of projects in the full CDM portfolio, but vary much in achieved emission reductions.

Demand for Certified Emission Reductions

The volume of the known contracted credits to date is dominated by the Dutch CERUPT programme and the World Bank�s Prototype Carbon Fund (PCF).* The Dutch tender closed in 2001 and will most probably not be reopened. The PCF is still open for projects. In the meantime, several programmes have emerged. The Japanese government intends to purchase CERs from Southeast Asia and there is an Asia Carbon Fund being established which aims at purchasing 200 000 tCO2-eq per year. In addition, the Finnish government has opened a tender for small-scale CDM activities.

Latest developments of projects in the ASEAN Region

A recent study identified the location of the first 100 Mt CO2 contracted or applied for under the CDM and only found 2 projects located in the ASEAN region � both of them in Thailand#. The Methodology Panel of the CDM Executive Board (CDM EB), however, has received new baseline methodologies for 3 projects in Thailand and one in Malaysia.

Of the three methodologies submitted to the Meth Panel of the CDM EB for different compounds of the same project in Thailand, non have been approved by the EB, mainly on the basis of the lack of an indication whether the project is additional, i.e., why the project is not the baseline. The Project Design Document (PDD) and the methodology for the Malaysian biogas project were incomplete and have not been taken into consideration by the Meth Panel yet.++

Concluding and summarising remarksThe Clean Development Mechanism is moving quickly into operation and has started to establish its first projects. The demand for CERs is rising quickly, with several countries already active on the carbon market in developing countries. To maximise the benefits of CDM for the host country in terms of foreign investment, sustainable development, and transfer of environmental benign technologies, the host country should have appropriate institutional capacity.

Despite extensive capacity building projects, the ASEAN countries have not yet implemented projects that could convince the body of the UNFCCC responsible for approval of the projects (the CDM Executive Board). All baseline methodologies and Project Design Documents submitted to the CDM EB have not been approved or not even been taken into consideration.

In general, it seems that more work needs to be done to increase understanding of the CDM procedures in the Southeast Asian countries. The interest to participate in CDM appears to be strong and good chances exist for the enhancement of green independent power producers for CDM, if in the institutions there is knowledge and capacity to make CDM work for local enterprises.

More information

Prototype Carbon Fund: www.prototypecarbonfund.org

Finnish JI/CDM Pilot Programme: http://global.finland.fi/english/projects/cdm/projects.html

Dutch government ERUPT and CERUPT: http://www.carboncredits.nl

CDM under the UNFCCC: http://cdm.unfccc.int

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* See Modalities and procedures for the CDM, Annex Decision 17/CP.7, article 29. To be found on http://cdm.unfccc.int/DNA

# Coninck, H.C., de, and Linden, N., van der, (ECN Petten (Netherlands)): An overview of carbon transaction: General characteristics and specific peculiarities. ECN-C�03-022, Petten March 2003

 ++ See Draft Report of the Sixth meeting of the Methodologies Panel, July 2003, available on http://cdm.unfccc.int