Written by Ellen Stenslie

(A PDF version of this factsheet can be downloaded from the box to the right)

The Kyoto protocol was established in 1997 as an international agreement on emission reduction of greenhouse gases (GHG). The protocol defines mandatory GHG emission targets for industrialized countries (Annex I countries), and voluntary participation for developing countries (Non-Annex I countries). The Kyoto protocol has 175 member countries, and 36 of these countries have committed to reduce their GHG emissions by five percent in the period from 2008 to 2012 compared to emissions in 1990, with the exception of Norway which is allowed to increase its emissions by one percent. The rest of the countries have no legal binding emission targets.

The Kyoto protocol has defined three mechanisms to ensure flexibility and cost effectiveness:

1. Emission quota trading: Annex I countries are allowed to trade emission quotas. Example: The European Trading System (ETS).

2. Joint Implementation (JI): Annex I countries are allowed to invest in emission reduction projects in other Annex I countries as an alternative to emission reduction in their own country.

3. Clean Development Mechanism (CDM): Annex I countries are allowed to invest in emission reduction projects in Non- Annex I countries as an alternative to emission reduction projects in their own country.

Lists of Annex I and Non-Annex I countries can be found using the links given at the end of this fact sheet.

CDM basics

CDM is a mechanism to ensure that Annex I countries can meet their emission reduction target in a cost effective way by financing GHG emission reduction in developing countries. If an Annex I country finance an emission reduction project in a Non-Annex I country, the project participants will be granted ”Certified Emission Reductions” (CERs), also called carbon credits. The number of CERs granted reflects the emission reduction; an emission reduction equal to one metric ton of CO₂ gives one CER. The CERs are tradable, and they can be used to supplement national GHG emission reductions.

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Annex I countries can not base all their emission reductions on CERs. The ETS limits emission reductions covered by CERs to 10 to 30 percents; the rest must be real emission reductions in the home country. There are two reasons for this limit; (1) to ensure that there are not too many CERs on the market and (2) to ensure that Annex I countries do not base all their emission reduction on buying CERs without reducing emissions at home. An illustration of how CDM works is given in Figure 1.

Only projects that contribute to sustainable development in developing countries are accepted as CDM projects.

Characteristics of CDM projects

Projects applying for status as CDM projects are evaluated carefully to ensure that the emission reductions are real, and the process of registering a CDM project takes six to eight months. The first step is to establish a Project Design Document (PDD) that describes the project, calculate CERs, and defines a plan for monitoring the project. In some cases an Environmental Impact Assessment is also required. The PDD have to be approved by a national certification body (Designated National Authority) in the host country as well as by an external certification body (Designated Operational Entity). If approved, the PDD is sent to the CDM Executive Board for final evaluation and approval.

A CDM project is constantly monitored by an external body to ensure that there are no deviations from the PDD. If the project performs as planned the CERs are issued by the CDM Executive Board.

Only projects that would not have taken place without the CDM will be accepted as a CDM projects, and this is referred to as the Additionality criteria. An example of additionality is a wind power project that is not profitable without the CDM, but with the added value of CERs it will be profitable.

A financial and/or technical analysis has to be performed to document additionality. The analysis has to highlight all reasons why the project would not happen without the CDM, and all technical, legal and infrastructural barriers must be described. The idea behind additionality is to ensure that CDM projects results in real emission reductions that would not have happened in a business-as-usual scenario.

Another prerequisite for CDM projects is that there exists a recognised method for calculating emission reduction. This is referred to as the Methodology criteria. Finally, CDM projects must also meet the host country’s criteria for sustainable development.

The complicated framework for registration of CDM projects has lead to criticism because several sustainable projects find the cost of CDM registration as a main barrier for the project. As an example, several smaller solar energy projects in developing countries have not taken place because of an expensive and complicated process of CDM registration. However, a new procedure called Programmatic CDM will reduce this barrier because it allows similar projects to be evaluated in one common process instead of several individual processes.

Another problem is that many potential CDM projects do not apply for CDM status due to lack of knowledge about the CDM registration process. There are also large commercial risks due to the uncertainty of future CERs prices.

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What kinds of projects are accepted by CDM?

CDM projects include energy efficiency, renewable energy production, methane emission reduction, and fuel switch projects. A typical CDM project is ”a low hanging fruit”, i.e. a project that can easily be performed in a short time frame. There are CDM projects within several industrial sectors including power production; steel, cement and paper plants; renewable energy; forestation; hydropower; and biomass. Some projects are controversial, like large water dam projects for hydropower and HFC₂₃ projects (HFC₂₃ is a GHG with a global warming potential 11.700 times higher than CO₂). The HFC₂₃ projects have so far been extremely profitable, and it is therefore discussed to exclude HFC₂₃ projects from the CDM. In addition, there is an intense debate on the possibility of including CO₂ Capture and Storage (CCS) in the CDM.

The geographical spread of CDM projects given in Figure 2 shows that there are a lot of projects in India, China and Brazil. The reason is that these countries have put a lot of effort in attracting investors for CDM by engaging consultancy companies to facilitate the CDM registration process. Furthermore, these countries are politically stable and are considered safer for investors than other developing countries. The uneven geographical spread is a problem, and the lack of activity in Africa has lead to heavy critics of the CDM.

Resultats so far and the road ahead

The Kyoto protocol created the first global market for CO₂ quota trading. Furthermore, an important result of the CDM is that CO₂ emission reduction projects are taking place in developing countries even though there are no legal binding emission targets for developing countries.

The market for CDM is increasing rapidly. At the moment there are more than 1.300 registered CDM projects and more than 700 projects in the registration process. By 2012 it is expected that CDM projects will have generated over 2 billion CERs.

Voluntary CO₂ markets have also been initiated in addition to the CDM. However, it is sometimes uncertain if traded credits in these voluntary markets have generated real emission reductions. It is therefore very important that CO₂ emission reduction projects are properly regulated and emission reductions well documented.

Host countries for CDM projects have experienced several positive effects from CDM; increased cash flow to emission reduction projects, more technology transfer, new jobs, and improved infrastructure.

One problem with the CDM is that the host countries define their own criteria for sustainable development, and these criteria are not always aligned with the common international understanding of sustainability.

The CDM will continue to be a very important tool in the strategy to reduce global CO₂ emissions, and it is an ongoing task to improve all the processes related to the CDM. However, the Kyoto protocol expires in 2012 and it is highly uncertain what happens with CDM post Kyoto. There is a common international understanding that there is a need for a mechanism like CDM also beyond 2012, but one challenge is to establish a mechanism that all countries can agree on, including the U.S. and other countries that have not ratified the Kyoto protocol.

External links

UNFCCC: http://cdm.unfccc.int/index.html

Capacity Development for the Clean Development Mechanism: http://cd4cdm.org/

List of Annex 1 countries (not all of these countries have ratified the Kyoto protocol): http://unfccc.int/parties_and_observers/parties/annex_i/items/2774.php

List of Non-Annex 1 countries (not all of these countries have ratified the Kyoto protocol): http://unfccc.int/parties_and_observers/parties/non_annex_i/items/2833.php

All external links are valid per 14 September 2007. Changes in external links after this date are beyond the control of the Bellona Foundation.