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What is the CDM and Why Should I Care?

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The Clean Development Mechanism (CDM) is one of the Kyoto Protocol’s flexible mechanisms, which allow industrialized countries to meet their emission reduction obligations by investing in clean energy projects in developing countries. The CDM is designed to promote sustainable development and help countries achieve their economic, social, and environmental goals. But what does that mean for businesses? And why should you care? Here’s a breakdown of everything you need to know about the CDM.

What is the Clean Development Mechanism?

The Clean Development Mechanism is a flexible mechanism under the Kyoto Protocol that allows industrialized countries to meet their emission reduction commitments by investing in clean energy projects in developing countries. A total of 38 industrialized countries and the European community have committed to reduce greenhouse gas emissions relative to their 1990 levels. And the projects is embraced by all 191 countries which have ratified the Kyoto Protocol. In order to meet these targets, they use a combination of domestic measures (such as energy efficiency improvements and fuel switching) and international trading (buying or selling emission permits). Countries can also use the CDM to meet their obligations.

What is the CDM standard?

The CDM standard is a list of rules that projects must comply with to be considered for issuance of CERs by the CDM Executive Board. The standard includes, among other things, questions about additionality, project design and environmental integrity.

What is additionality?

Additionality is the principle that a project activity can only qualify as an offset if it would not have happened without CDM support. The principle ensures that the investment of Renewable Energy Certificates (REC) and Verified Emission Reduction Units (VERs) provides real, incremental and additional emission reductions.

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How do I know if a project is eligible under the CDM?

You can check the CDM’s eligibility criteria before your company invests in offset projects. The eligibility criteria include the type of project, the degree of additionality, location and technology.

All carbon offset projects under the CDM must contribute to sustainable development. They must produce real, measurable and long-term environmental benefits beyond those that would occur without the project activity.

How does the CDM work?

For a project to be considered for the issuance of CERs, it must be registered with an operating agency designated under the Protocol. The CDM Executive Board then reviews and approves projects under certain requirements. Projects are approved on a “project-by-project” basis by the CDM Executive Board.

What are some of the key points of the CDM?

  • It establishes a market for carbon by allowing industrialized countries to buy “carbon credits” from developing countries, where projects that result in reduced greenhouse gas emissions are implemented. Under the Kyoto Protocol, one carbon credit is equal to one metric ton of CO2 and governments can either invest themselves in CDM projects or they can allow private companies and individuals to fund the projects.
  • The Kyoto Protocol caps the amount of greenhouse gas that industrialized countries are allowed to emit each year, but since businesses continue emitting greenhouse gases into the environment as usual, this means that industrialized countries have to buy credits from projects in developing countries which result in reduced emissions.

What types of projects are eligible for the CDM?

The following activities are currently eligible under the CDM: energy efficiency; renewable energy; co-generation; waste-to-energy; destruction of industrial ozone depleting substances, and reduced methane emissions from oil and gas exploration. However, the CDM is expected to grow significantly over the next decade.

What sectors of businesses does this affect?

Any business which emits greenhouse gases can buy carbon credits through the CDM including: power generation; heavy industry; commercial and residential building; transport and waste management. (For a more detailed list of eligible sectors visit UNFCCC website on the CDM). As the CDM is likely to grow, this creates new opportunities for businesses in many different sectors.

What are the 7 types of emission reduction projects possible under the CDM?

The 7 types of emission reduction projects possible under the CDM are:

  1. End-use energy efficiency improvements
  2. Supply-side energy efficiency improvement
  3. Renewable energy
  4. Fuel switching
  5. Agriculture (reduction of CH4 and N2O emissions)
  6. Industrial processes (CO2 from Cement etc., HFCs, PFCs, SF6)
  7. Sinks projects (only afforestation and reforestation)

To break that down, let’s take a deeper look at each project type.

  • End-use energy efficiency improvements can be defined as reductions in the energy consumption of households, commercial buildings, industrial facilities and/or power generation plants.
  • Supply-side energy efficiency improvement can be defined as reductions in primary energy production due to increased refinery efficiencies or more efficient conversion processes.
  • Renewable energy is any source of naturally replenished energy that will never run out. This includes: hydro, solar, wind and geothermal power.
  • Fuel switching is the deliberate replacement of a specified fossil fuel (typically coal) with another source of energy (typically natural gas). The reduction in emissions from using the latter instead of the former are credited under this category.
  • Agriculture projects are defined as any project which results in reduced emissions of methane or nitrous oxide. This can include any number of projects including: rice production, fertilization changes, feedlot practices etc.
  • Industrial processes is defined as the reduction in greenhouse gas emissions from any chemical process. It can include reducing HFCs, PFCs and SF6 by venting rather than flaring these gases, or by eliminating leaks from refrigerant systems. The capture of methane emissions from landfills and coal mines is also included under this category.
  • Sink projects are defined as any project which results in the sequestration of greenhouse gases, including afforestation and reforestation.

The CDM website has a list of all currently approved carbon credits as well as a detailed description of each type of carbon credit.

What are the benefits of CDM?

In short, companies can earn carbon credits which look to offset their greenhouse gas emissions. The credits have a monetary value and this allows an additional revenue stream for businesses that implement projects in developing countries under the Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implementation (JI).

The benefits of CDM can be divided into 2 categories, technology transfer and market creation. Technology transfers occur when emissions reduction technologies are transferred to developing countries under the CDM. The second benefit is market creation which means that projects in developing countries create new demand for energy efficient products e.g. machines which allow large industrial plants to produce more but with reduced energy consumption.

What are some of the challenges of the CDM?

The CDM is one component of the Kyoto Protocol, and is meant to help industrialized countries meet their emission reduction targets. Businesses in these countries that wish to be compliant with the treaty can purchase credits from companies and individuals in developing countries who have achieved reduced emissions from various projects. However, this system is rife with severe flaws. For one thing, it forces developing countries to meet emission reduction goals set by industrialized nations (although there is some room for them to create their own proposals as well). Secondly, these projects are not truly “clean” as many of the efficient technologies and practices used in developed countries are not available in developing countries. Finally, the CDM has led to deforestation and land use change in developing countries such as Brazil and Indonesia that were supposed to be avoided under the Kyoto Protocol’s “prevention of deforestation” provision. But it is a work in progress, and like all things sustainable the market is developing rapidly as shortcomings are being addressed and the industry continues to define itself.

What are the criticisms of CDM?

There are several criticisms of CDM, some valid and others less so.

The first criticism is that companies actually profit from their investments in developing countries due to increased demand for purchasing emission reduction technology. Critics argue that this is inappropriate as the carbon market was developed to help developing countries meet emission goals not for developed nations to meet their own goals.

Another criticism is the so-called “perverse incentives” scheme. This scheme states that since companies can actually increase their profits by finding ways to be non-compliant and emit more than they should, there is little incentive for companies to reduce their emissions. In fact, some industry experts argue that this has been the case in the early years of carbon trading.

Finally, one criticism is that CDM projects have actually led to deforestation in Brazil and Indonesia. This could perhaps be attributed to a lack of international oversight in CDM projects, which could be easily corrected with proper international oversight.

Why should I care about the CDM?

The CDM can be an invaluable tool in combating climate change for both developed and developing countries alike. While it has its flaws, the CDM is a great example of what can happen when government policy meets private sector business interests. By encouraging companies to invest in developing countries, this program can help de-couple the link between economic growth and carbon dioxide emissions.

What is the CDM project baseline?

The CDM baseline is the level of emissions that would otherwise have occurred during a project’s lifetime without any clean development mechanism intervention. The baseline must be established through an appropriate methodology, approved by the executive board of the CDM.

What is a CDM methodology?

The methodology is the set of rules and procedures for determining what emissions reductions are counted in your project. For example, one methodology for a wind farm might include guidelines on how to calculate emissions avoided due to less power produced by coal plants (the energy displaced). Another example might be a methodology for a wastewater treatment plant, which would include guidelines on how to calculate savings due to reduced methane and nitrous oxide emissions.

What is the CDM registry?

The CDM registry is a database that stores and disseminates information about approved CDM projects. It is used by those involved in the CDM to refer to a project, as well as for those who are seeking information about that project. The list is available to the public and can be accessed via the CDM registry website.

What is Joint Implementation (JI) and how does it work?

Joint implementation is under the Kyoto Protocol’s Clean Development Mechanism (CDM) and is a flexible, efficient mechanism for advancing emission reductions in nations that have ratified the protocol (191). Countries with an emission reduction target under the Kyoto Protocol can meet their obligation by implementing emission reduction projects both domestically and in other participating countries. In addition to helping companies limit their carbon footprint, it also provides a sustainable foundation for international trade because transfers occur only after project activity has been verified and validated.

What are the 3 steps for setting up a JI?

The process for setting up a joint implementation project includes three steps:

Step 1: Negotiations and Agreement: A potentially interested country implements domestic policies and programs (e.g., regulations, tax incentives) to reduce the cost of participating in joint projects abroad. The country then reaches out to other potentially interested countries and negotiates a framework agreement that outlines the responsibilities of each party.

Step 2: Joint Implementation Project Design: Countries develop a project by specifying the methodologies, measuring, monitoring, reporting and verification protocols to be used. Each country then conducts a “baseline study” to determine what emissions reductions have already been achieved through government policies and programs.

Step 3: Project Implementation: The implementing country conducts project activities specified in the agreement, e.g., reforestation or installation of energy-efficiency measures, while the other partner provides assistance in areas such as capacity building, training and technology transfer.

Why should I care about Joint Implementation (JI)?

Joint implementation is a marketplace for emission reductions and promotes the transfer of environmental goods and services to developing countries. While it has led to controversy in some countries, such as Poland, carbon trading through JI projects can now be viewed as a valuable tool that is likely to grow over time.

What is a Certified Emission Reduction Unit (CERs)?

Certified Emission Reductions are defined in Article 12 of the Kyoto Protocol. According to Article 12, a CER is the “certified emission reduction” established by a designated operating agency for a specific commitment period and issued in accordance with the rules, procedures and guidelines adopted by the Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol (COP/MOP).

Each credit represents one metric tonne of CO2 equivalent. One CER was generated by one certified emission reduction – or one tonne of CO2 equivalent – verified by the United Nations Framework Convention on Climate Change (UNFCCC) secretariat.

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What should I know about Certified Emission Reduction Units (CERs)

The Kyoto Protocol says that verified emission reductions of greenhouse gases can be counted toward meeting commitments under the protocol. The benefits include sources of revenue, market development and opportunities for economic growth in developing countries.

What are offsets and Why do I need them?

Offsets, also known as Certified Emission Reduction Units (CERs), are emissions reductions that can be counted toward meeting commitments under the Protocol. They are created when one tonne of carbon dioxide equivalent is reduced or sequestered in a project that has been approved by an operating agency designated by the Conference of the Parties to the Kyoto Protocol. You may need them to meet your compliance obligations, which are measured in units of one or more tonnes of CO2 equivalent. You may also choose to invest in them, as they can lead to revenue and opportunities for economic growth.

Offset projects are approved by an operating agency designated under the Protocol before being issued with CERs, to ensure that they meet environmental integrity standards. Each CER represents one verified tonne of CO2 equivalent. A new clean development mechanism (CDM) project results in the creation of a single new CER, representing one tonne of CO2 equivalent reduced or sequestered through that investment.

How many offsets do I need?

You may choose to buy credits equal to your actual emissions, or to achieve a certain emissions reduction – if your business emits 10,000 tonnes you will need to purchase 10,000 CERs. Alternatively, it may be cheaper for you to buy credits equal to 10% of your emissions (1,000 in the above example).

How much do they cost?

The price is set by the market, keep in mind that they are meant to be an investment.

How do I sell them?

The Kyoto Protocol created the Certified Emission Reduction (CER) Registry which was opened for business on January 1st, 2005. This registry is now operated by the United Nations. Through this registry you can list your CERs and sell them on the open market to buyers who wish to offset their own emissions.

Why do I need them?

Carbon credits can be used as a medium of exchange for greenhouse gas emission reductions, and help businesses meet compliance obligations. They may also be used by organizations or individuals; they can lead to revenue and opportunities for economic growth in developing countries. But they are meant to be used in conjunction with other carbon emission efforts in the transition to sustainability.

What makes a Carbon Credit?

Carbon credits are the result of projects that reduce or avoid greenhouse gas emissions by using cleaner energy technologies, such as solar and wind energy, hydropower and geothermal. These projects typically generate some form of revenue to fund further climate related activities.

What is environmental integrity?

In this case, environmental integrity refers to the verification of emissions reductions associated with an emission reduction project to ensure that they are, in fact, reducing or avoiding greenhouse gas emissions. The United Nations Framework Convention on Climate Change (UNFCCC) has set up the Clean Development Mechanism (CDM), one mechanism for creating carbon credits.

What is the difference between CERs and Emission Reduction Units (ERUs)?

Carbon credits are issued according to rules and policies set by the UNFCCC and domestic authorities, and can be used to meet compliance obligations (in the international market) or invested; they represent one verified tonne of carbon dioxide equivalent reduced or sequestered through an approved Clean Development Mechanism (CDM) project.

ERUs are issued according to rules decided on by the Joint Implementation Supervisory Committee (JISC) of the UNFCCC. ERUs result from projects that are registered under the JI mechanism, they are issued by the CDM Executive Board and can be used to meet compliance obligations in the international market or invested. An ERU is one verified unit of carbon dioxide equivalent reduced or sequestered through an approved JI project.

What is the difference between CERs and Certified Emission Reductions (CERs)?

Carbon credits are issued according to rules and policies set by the UNFCCC and domestic authorities, and can be used to meet compliance obligations (in the international market) or invested; they represent one verified tonne of carbon dioxide equivalent reduced or sequestered through an approved Clean Development Mechanism (CDM) project.

Certified Emission Reductions were the predecessor to CERs and were issued according to rules and policies set by the UNFCCC and domestic authorities; they could be used for compliance purposes in the international market or invested; they represented one verified tonne of carbon dioxide equivalent reduced or sequestered through an approved Clean Development Mechanism (CDM) project.

What are the rules governing emissions trading?

Emissions trading allows countries to meet emissions targets by buying or selling carbon credits on the world market, based on the total amount of greenhouse gas emissions permitted for their respective economies. The Kyoto Protocol lays out rules for emissions trading, but gives each country the freedom to decide whether or not to use it.

What is the largest greenhouse gas emitting country?

China, who has recently become much more proactive in their negotiations with other countries on carbon emissions. They are closely followed by the United States.

In conclusion on the CDM

The Clean Development Mechanism (CDM) is a process to help companies in developed countries reduce their greenhouse gas emissions, and at the same time, helps developing countries achieve sustainable development. It does this by providing incentives for emission-reducing projects in developing countries. There are two ways to participate in the CDM: as a project sponsor or as an observer. If you want to know more about how it works and what benefits there are to participating, keep reading. We’ll explain everything you need to know about the Clean Development Mechanism, from what it is to how CDM projects work. And if you still have questions after reading this post, don’t worry – we have experts on our team.

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