clean development mechanism cdm dp final

7/31/2019 Clean Development Mechanism CDM DP Final

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2010

Jason Gordon

Evans School of Public Affairs

PB AF 608 C

6/2/2010

The CDM and Sustainable Development


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Table of ContentsExecutive Summary ....................................................................................................................................... 4

1. Introduction .............................................................................................................................................. 5

1.1 Climate Change Basics ........................................................................................................................ 6

1.2 The UNFCCC and the Kyoto Protocol .................................................................................................. 7

1.3 The Kyoto Mechanisms ....................................................................................................................... 8

2. CDM History and Overview ..................................................................................................................... 10

2.1 Clean Development Mechanism Project Cycle ................................................................................. 12

2.2 Example of a Hypothetical CDM Project ........................................................................................... 13

2.3 Description of Actual CDM Projects .................................................................................................. 14

3. The CDM and Sustainable Development (SD) ......................................................................................... 15

3.1 Tension within the CDM.................................................................................................................... 163.2 How CDM projects may contribute to SD ......................................................................................... 18

3.3 Differing Perspectives on Sustainable Development and the CDM ................................................. 20

3.4 Host country requirements to ensure sustainable development benefits from CDM projects ....... 23

3.5 Applying Sustainable Development Criteria to CDM Projects .......................................................... 24

4. Geographic Distribution of CDM Projects ............................................................................................... 26

5. CDM Change over Time .......................................................................................................................... 28

6. Institutional Analysis of the CDM............................................................................................................ 30

6.1 CDM and Transaction Costs .............................................................................................................. 30

6.2 Stakeholder Analysis ......................................................................................................................... 31

6.3 CDM Additionality and Sustainable Development ........................................................................... 33

6.4 One Instrument for Multiple Goals ................................................................................................... 33

7. Problem Statement and Research Question ........................................................................................... 34

7.1 Current Reforms ................................................................................................................................ 34

7.2 Possible Policy Alternatives .............................................................................................................. 36

8. Summary of Background and Policy Alternatives ................................................................................... 41

9. Methodology ........................................................................................................................................... 42

9.1 Policy Evaluation ............................................................................................................................... 42

9.2 Sustainable Development Measurement ......................................................................................... 43

9.3 Program Theory of Change Analysis ................................................................................................. 44


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9.4 Measuring Sustainability: Content Analysis of Sustainable Development Contribution of CDM

Projects ................................................................................................................................................... 52

9.5 Taxonomy for Assessment of Sustainable Development Benefits of CDM Projects ........................ 57

9.6 Narrowed Analytical Focus: .............................................................................................................. 60

9.7 Example Project Coding .................................................................................................................... 61

10. Results of PDD Content Analysis ........................................................................................................... 64

11. Analysis of Reform Alternatives ............................................................................................................ 64

12. Discussion .............................................................................................................................................. 68

12.1 Alternative 1: SD-CER Premium ..................................................................................................... 68

12.2 Alternative 2: SD Certification - Sustainability Labeling.................................................................. 69

12.3 Alternative 3: Establish a Clean Development Fund ....................................................................... 70

13. Decision Matrix ..................................................................................................................................... 72

14. Policy Recommendations ...................................................................................................................... 73

15. Conclusion ............................................................................................................................................. 74

16. Appendix ............................................................................................................................................... 75

Figure 1. CDM Outline ............................................................................................................................. 75

Figure 2. Current CDM Pipeline of Projects Figure 3. Project Category Breakdown ............... 76

Table 1. Percentage of total issued CERs by Project Type ...................................................................... 76

Figure 4. CERs issued by Project Type ..................................................................................................... 77

Table 2. Millennium Development Goals relevance to CDM projects .................................................... 77

Copenhagen (COP 15) and the CDM ....................................................................................................... 79

Common Abbreviations and Acronyms .................................................................................................. 81

Works Cited ................................................................................................................................................. 81

With Appreciation for Assistance and Advisement to:

Zbigniew Bochniarz Evans School of Public Affairs

Joe Cook Evans School of Public Affairs

Carrie Lee Stockholm Environment Institute

Michael Lazarus - Stockholm Environment Institute


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Executive Summary

The Clean Development Mechanism of the Kyoto Protocol seeks to aid developed

countries in efficiently meeting their GHG emissions reductions goals while contributing to

sustainable development in developing countries. CDM project developers are rewarded with

tradable credits upon project completion after the GHG reductions of the project are verified by

an outside auditor. Current literature suggests that the market structure of the CDM leads

project developers and host countries to focus on the GHG emissions reduction objective while

paying little attention to sustainable development or the equitable distribution of projects in

the developing world. This study attempted to build on efforts to measure CDM sustainable

development impacts and gauge which of four CDM reform options would best correct the

imbalance between the CDMs dual objectives. Several methods including program theory and

content analysis were used to make a broad multi-criteria assessment of the reform options.

The results show that a reformed CDM which used the market to price sustainable

development increased sustainable development impacts and greatly increased the geographic

diversity of projects.


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1. Introduction

The Clean Development Mechanism (CDM) is one of three instruments of the Kyoto

Protocol, an internationally binding agreement to reduce the emissions of greenhouse gases.

The CDMs dual mandate is to mitigate climate change and contribute to sustainable

development. In Article 12 of the Kyoto Protocol where the CDM is outlined, sustainable

development benefits are put on equal footing with emissions reductions. This wording was the

result of a compromise during the Protocol negotiations where developing nations saw an

opportunity to garner substantial investments and new technology to foster sustainable growth

while at the same time industrialized nations were offered a cost-effective alternative to

domestic emissions reductions. Since its inception in 2005, the general consensus is that the

CDM has worked successfully at promoting emissions reductions through a carbon offset

market but has failed at effectively promoting sustainable development in developing countries

hosting projects.

The perceived tension between the two goals of the CDM market efficiency in

lowering emissions and sustainable development (nonmarket improvements in human welfare


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and the local environment) have raised questions about the potential for climate policy to

promote sustainable development (Nathan E. Hultman, 2009, p. 121).

This review of the literature seeks to understand the tension within the CDM, and

attempts to address it so sustainable development is given the same weight in practice as it is

within the rhetoric of the Kyoto Protocol. Can the CDM be win-win or should it as some

suggest, focus exclusively on utilizing market efficiencies to bring about as many emission

reductions as possible? Can sustainable development be incorporated into the CDMs core

incentive structure?

1.1 Climate Change Basics

Since the beginning of the industrial age, the burning of fossil fuels (primarily coal and

oil) and deforestation have caused the concentrations of heat-trapping greenhouse gases (CO2,

HFC, NO2, CH4, O3) to increase significantly in the atmosphere. Similar to the glass panels of a

greenhouse, these gases prevent heat from escaping to space.

Greenhouse gases are necessary - without them, the temperature of the Earth would be

too cold to sustain life as we know it. However, as these gases continue to accumulate in the

atmosphere, the Earth's temperature is climbing above historic levels. According to NOAA and

NASA data, the Earth's average surface temperature has increased by about 1.2 to 1.4F in the

last century. Further confirmation that the Earth is warming is that the eight warmest years on

record (since 1850) have all occurred since 1998, with the warmest year being 2005 (U.S. EPA).

In 2007 the Intergovernmental Panel on Climate Change (IPCC) concluded that it is

more than 90% likely that humanitys greenhouse gas emissions are responsible for climate


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change. In order to avoid what many climate change scientists predict to be the point at which

the climate system becomes unstable, the IPCC predicts it will cost $1.375 trillion (2.5% of

global GDP) per year to mitigate climate change and keep global temperature increases to less

than two degrees Celsius1

(IPCC AR4). If the world fails to stabilize emissions to limit the

temperature increase, scenarios abound of catastrophic sea-level rise, increased droughts and

flooding, pestilence, famine, war, and death. Though the efforts to coordinate climate change

mitigation have been ongoing, the nations of the world have yet to achieve an effective model

to reach the agreed-upon goal: sustainable development that reduces climate change risk

(making abrupt and/or catastrophic climate change less likely). Partially, this is due to the

extraordinary complexity of the problem that involves multiple actors with varying preferences,

a long time-scale, critical uncertainties, and a weak international system.

1.2 The UNFCCC and the Kyoto Protocol

The United Nations Framework Convention on Climate Change (UNFCCC) is an

international environmental treaty agreed upon at the Earth Summit (Conference on

Environment and Development) held in Rio de Janeiro in June of 1992. Legally non-binding, the

192 parties to the UNFCCC meet annually at the Conference of Parties (COP) to assess progress

in efforts to address climate change. The most enduring update of the UNFCCC has been the

Kyoto Protocol, a legally binding agreement that sets mandatory emission limits for a number

of industrialized countries. A core principle in the Protocol is for all parties to protect the

climate system for the benefit of present and future generations of humankind, on the basis of

equity and in accordance with their common but differentiated responsibilities and respective

1The upper limit of warming after which climate scientists predict dangerous consequences (changing weather

patterns, rising sea levels, increased disease vectors, etc.)


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capabilities (KYOTO PROTOCOL, n.d.). The Kyoto Protocol was initially adopted in 1997. It

went into effect in 2005 and will enter into its next phase in 2012. 187 nations have signed and

ratified the protocol that has the goal of achieving

stabilization of greenhouse gas concentrations in the atmosphere at a level that would

prevent dangerous anthropogenic interference in the climate system Such a level should

be achieved within a time-frame sufficient to allow ecosystems to adapt naturally to

climate change, to ensure food production is not threatened and to enable economic

development to proceed in a sustainable manner (UNFCCC Art. 2).

Through national measures as well as market-based flexible mechanisms, the Kyoto

Protocol is an effort to establish a legally binding international agreement where all signatory

nations commit themselves to reducing greenhouse gas emissions. The original target set was a

reduction of 5.2% GHG concentrations from 1990 levels by 2012. The Protocol additionally

includes an adaptation fund to finance efforts to minimize impacts of climate change on

developing countries. The flexible market mechanisms by which countries could seek efficiently

meet their targets include emissions trading, the clean development mechanism, and joint

implementation.

1.3 The Kyoto Mechanisms

The main issues grappled with in the Kyoto Protocol negotiations revolved around two

questions: how much climate change risk is reasonable and how to share the burden of

emission reduction equitably? The following mechanisms were seen as ways to address both of

these questions in the most efficient way possible.


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1) Joint Implementation: (between Annex I2 countries only): Any Annex I country can invest in

emission reduction projects in any other Annex I country as an alternative to reducing

emissions domestically.

2) Emissions Trading: (between Annex I countries only): ET is an administrative approach used

to control pollution by providing economic incentives for achieving reductions in the emissions

of pollutants. A central authority such as a government sets a limit or cap on the amount of a

pollutant that can be emitted. Companies or other groups are issued emissions permits

(through an auction or other mechanism) and are required to hold an equivalent number of

allowances (credits) which represent the right to emit a certain amount. The total of allowances

and credits cannot exceed the set cap, thus limiting total emissions to that level. Companies

that need to increase their emission allowance must buy credits from those who pollute less.

The transfer of allowances is referred to as a trade. In theory, this system, also called cap and

trade, puts a price on the pollutant and creates a market for efficient reduction of emissions.3

3) Clean Development Mechanism: The CDM promotes co-operative measures between the

industrialized (Annex-I) and the developing (non-Annex-I) countries. The CDM allows Annex-I

countries to implement projects that reduce greenhouse gas emissions in non-Annex-I party

nations. This reduction produces Certified Emission Reduction credits (CERs), each equivalent to

one ton of CO24. CERs can be traded and sold on most carbon exchanges, giving Annex-I

2Annex I refers to all developed countries and economies in transition that are party to the UNFCCC. By default, all

other countries are referred to as non-Annex I. Only Annex I countries are currently committed to targeted

reductions of GHG emissions.3

Other examples of Emission Trading schemes include the U.S. Clean Air Act and the Montreal Protocol.4

Since CO2 is not the only greenhouse gas, CERs are also referred to as being equivalent to one ton of CO2e or

CO2 equivalent.


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countries the possibility of achieving their commitments more cost-effectively, and through the

investment and development benefits of projects, helping non-Annex I countries achieve

sustainable development (Tucker, 2009, p. 2). For a graphical representation of how the CDM

functions, see Appendix, Figure 1.

By treating greenhouse gas emissions as commodities, the flexible mechanisms of the

Kyoto Protocol aim to help price greenhouse gases and use markets to internalize the negative

externalities of emitting sectors of the economy. Like JI, the CDM functions as a baseline-and-

credit system, through which credits can be earned by reducing greenhouse gas emissions

against a constructed baseline. The mechanisms themselves do not reduce GHG emissions but

rather through the global carbon marketplace they create, make emissions reductions more

efficient (van Asselt & Gupta, 2009). In other words, the origin of GHG emissions is not

important from an environmental standpoint. Of vital importance is that global GHG

atmospheric concentrations are reduced at least cost to the global economy.

2. CDM History and Overview

Article 12 of the Kyoto Protocol to the United Nations Framework Convention on

Climate Change defines the purpose of the CDM as being:

to assist Parties not included in Annex I in achieving sustainable development and in

contributing to the ultimate objective of the Convention and to assist Parties included in Annex-

I in achieving compliance with their quantified emission limitation and reduction commitments

under Article 3(KYOTO PROTOCOL, n.d.).


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Article 12 of the Kyoto Protocol was a product of heated controversy and negotiations.

Because of the last-second nature of the proposal and its relative importance at Kyoto in

facilitating the passage of the protocol, the chair of the negotiations, Ambassador Ral Estrada-

Oyuela, called Article 12 the Kyoto Surprise. The CDM originated from a proposal made by

Brazil in the lead up to the Kyoto meeting for a Green Development Fund (GDF) supported by

countries who fail to comply with commitments. The GDF would be used to support adaptation

and mitigation projects in developing countries. As negotiations progressed, it became clear

that developed countries were strongly opposed to penalties for noncompliance. As a result,

Annex-I country non-compliance was taken out and replaced with project-based emissions

trading. Developing countries maintained that responsibilities to mitigate greenhouse gases

should be based on each countrys historic emissions rather than present contributions to

global warming. Instead of capping non-Annex-I (developing countries) emissions, the proposal

suggested they be given time for economic development before taking on reduction targets.

Taking into consideration Brazils initial proposal, the CDM focuses on mitigation projects

financed by Annex-I parties in developing countries (Linnr & Jacob, 2005, p. 408).

Putting it in a slightly different way, the CDM emerged as an initiative of less-developed

countries that perceived the Kyoto Protocols emissions-reduction mandates as a threat to their

development plans. By incorporating a high-powered market mechanism to channel resources

for development activities to less-developed countries, the CDM tempered opposition to Kyoto

and its possible negative effects on growth in the developing world. In this way, the CDM can

be seen as a compromise on the need to achieve reductions in GHG emissions but also allow

development to continue unhindered. One researcher put it this way: In the developed world,


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the name of the game is balancing political will with the costs of reducing GHG and the risks of

climate change; in the developing world, the main concern is development and adaptation (

Bozmoski, Lemos, & Boyd, 2008, p. 19). The ostensibly win-win nature of the CDM at its

inception supported the interests of diverse actors including policymakers in developing

countries; business groups in developed countries; development practitioners;

nongovernmental organizations; and community leaders looking for additional approaches to

improve the lives of those in less developed countries. These diverse interests are enshrined in

Article 12 and help to understand both the CDMs dual objectives and why it was a crucial

component in the final acceptance of the Kyoto Protocol (Alexander Bozmoski et al., 2008, p.

20).

2.1 Clean Development Mechanism Project Cycle

Unlike allowance trading in which parties are granted a quota of emission credits and

may then trade under this cap, the CDM is project-based. New credits are continuously being

created as new projects are verified. CERs are fungible with other carbon credits under the

Kyoto framework and can be traded on ET exchanges like the European Emissions Trading

Scheme (ETS) (Boyd et al., 2009, p. 821).

The CDM is a project-based system that generates credits only after individual projects

are approved by the regulatory body. While many developed countries and regional groups

have cap-and-trade systems, the CDM remains the only existing regulatory mechanism that

allows for pricing greenhouse gases in developing countries. A CDM project qualifies through a

clearly defined process designed to measure and verify emission reductions. Before generating

income, a project must go through the following steps:


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During the Project Design phase, a standardized Project Design Document (CDM-PDD)

must be completed with information about the proposed project activities and the parties

involved. The CDM-PDD is submitted along with the baseline and monitoring methodology that

will be used to determine the total emissions reduction of the project activity. The Project

Design must then be validated independently by a designated operational entity (DOE) against

the requirements of the CDM. The host country designated national authority (DNA) must also

approve the project (including its impact on sustainable development). After validation, the

project can be registered with the CDM Executive Board. Registration is a prerequisite for

verification/certification and issuance of Certified Emission Reduction credits. During the

Verification/Certification phase, periodic independent review of the project by the designated

operational entity verifies the monitored reductions in GHG that have occurred as a result of

the project activity. Certification is the written assurance by the designated operational entity

that GHG reductions were verified during the specified time period of the project activity

(CDM: Guide to do a CDM project activity,).

2.2 Example of a Hypothetical CDM Project

Norway may finance an electricity cogeneration project at a sugar plant in Brazil. The

project would, in turn, generate certified emission reductions (CERs), each of which

represents a one-ton reduction of carbon dioxide (CO2) equivalent. If Norway cannot

Project Design Validation Registration Monitoring

Verification andCertification

Issuance ofCERs

Distribution ofCERs


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meet all its Kyoto commitments through domestic action, or if it is cheaper to fulfill those

commitments by reducing emissions in a less-developed economy, Norway may either

sponsor the cogeneration project and deduct the ensuing CERs from its domestic

commitments, or, alternatively, Norway may purchase CERs generated unilaterally from

another sugar plant that financed its own CDM project.

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Brazil and Norway would bothbenefit in this hypothetical deal. Revenue, and perhaps technology, would flow to Brazil;

Norway would shrink its compliance costs; and lower overall costs would accommodate

more aggressive global targets (Alexander Bozmoski et al., 2008).

2.3 Description of Actual CDM Projects

In contrast to the win-win picture painted above, initial research into actual projects

both verified and still in the CDM pipeline showed that the host country (Brazil above) may not

receive the kind of sustainable development and technology transfer benefits that the rhetoric

implies. The majority of CDM projects to date with the highest CER issuance can be seen in

Appendix, Table 1 and graphically in Figure 4. As the table illustrates, the bulk of CERs come

from end-of-pipe projects that eliminate NO2 and HFC-23. As these are potent greenhouse

gases, projects like these generate an enormous amount of CERs making them very profitable in

comparison to smaller scale projects that might contain more sustainable development

attributes.

As the CDM has matured, there is growing evidence that the low-hanging fruit of high-

CER industrial gas projects have been picked and there is a clear trend towards smaller-scale

renewable energy project, energy-efficiency and waste gas capture projects that have more of a

technology transfer and SD benefit to host countries.

5Private companies also sponsor, originate, and trade certified emission reductions (CERs).


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3. The CDM and Sustainable Development (SD)

Sustainable Development is defined and measured in many different ways depending on

the context. A multi-dimensional concept, measurement of SD often encompasses

environmental, social, and economic indicators. In their review of the sustainable development

contributions of the CDM, researchers Martin and Fankhauser compare these dimensional

indicators of SD as a set of assets that, if declining in value, are considered on an unsustainable

development path where future well-being is less than current wellbeing (Fankhauser &

Martin, 2010). The assets include physical, social, and natural capital.

Does the CDM meet its objective to assist Partiesnot included in Annex-I in achieving

sustainable development and in contributing to the ultimate objective ofthe Convention? As

mentioned in the history of the CDM, one of the factors underpinning developing country

support for the Kyoto Protocol is the idea that the CDM is not simply a market tool for lowering

emissions but one that delivers concrete benefits in the form of sustainable development on

the local and national levels (Boyd et al., 2009, p. 828). Evidence suggests that the CDM is

proving to be a successful tool for reducing Kyoto compliance costs in developed countries and

spurring greenhouse gas abatement in rapidly industrializing countries. However, how is the

CDM contributing to sustainable development in project host countries?

The question of whether the CDM is promoting sustainable development is framed by

some primarily in terms of whether it is promoting renewable energy technologies in

developing countries and thus assisting in the transition away from fossil fuels. Current

evidence shows that most industrialized country governments and corporations are using the

CDM only to reduce the costs of complying with their Kyoto targets and as such are searching


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for projects that deliver large volumes of cheap credits (like N2O and HFC-23 industrial gas

projects). These projects shift the location at which emissions reductions are made without

delivering additional sustainable development benefits to host countries and do not catalyze

fundamental shifts in energy production and use (Pearson, 2007, p. 247). Others view

sustainable development more broadly than simply a switch to renewables. Nathan Hultman of

the Brookings Institute argues that CDM projects could be construed as having an SD element

if they contribute to local environmental benefits, job growth, income equity, technology

development, or additional energy infrastructure in developing nation economies (Nathan E

Hultman et al., 2009, p. 121).

3.1 Tension within the CDM

Many scholars have criticized the

CDM in practice for not realizing the

sustainable development benefits

envisioned in its formation. Vague SD

criteria and no mandated proof for meeting

those criteria leave project developers free

to improvise and ignore priorities of local communities (Alexander Bozmoski et al., 2008).

Simply put, there seems to be an unavoidable trade-off between the CDMs dual mandates to

reduce emissions efficiently and spur sustainable development. As one scholar puts it, the

CDMs first mandate to help reduce Kyoto compliance costs is all but making impossible the

fulfillment of its second mandate to promote sustainable development(Pearson, 2007, p. 247).

Despite years of successful engagement of host-country actors in carbon abatement, attraction


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of industrial country investment in developing countries, and lowered mitigation costs for

developed countries, initial analyses of CDM project documentation point to few local co-

benefits (Alexander Bozmoski et al., 2008, p. 22). The original promise of supporting

sustainable development generated high expectations. Research is showing that in many cases,

those expectations are going unfulfilled. CDM projects to date show both a preference for

rapidly industrializing states over less developed ones and a distribution of carbon revenue that

benefits large industrial actors over local populations. Rather than facilitating a transition to

low-carbon development, the CDM was initially criticized by many for subsidizing the nylon,

fertilizer, and refrigerant industries in a few large developing countries (Wara, 2007). One way

the CDM has been characterized is as a race to the bottom. A simplified explanation is that

market incentives do not attract investors to the projects with the strongest sustainable

development links. Market actors find low-cost, high yield projects and crowd out projects with

links to development and smaller returns. Host country governments competing for investment

also have little incentive or power to impose sustainable development criteria on projects.

Economies of scale and high transaction costs simultaneously hurt small, more sustainable-

development oriented projects.

Due to the market-based structure of the CDM, developing countries have few

incentives to pursue stringent SD criteria as they are effectively competing for CDM projects

and rigorous standards will likely deter potential investors by raising the cost of developing a

project. A study of the CDM projects in India show that it is easy to get a project approved on

SD grounds. Because the CDM encourages investors to seek out the lowest-cost reductions,

projects that make considerable contributions to SD may be at a disadvantage. Evidence shows


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that some of the most attractive projects to investors, with high CERs produced, have a

relatively small impact on sustainable development, and the CDM as currently structured does

not provide incentives for projects that exceed minimum SD standards. (U.S. GAO, 2008)

3.2 How CDM projects may contribute to SD

CDM projects can contribute to sustainable development in two ways: the project

activity may contribute directly to SD, and/or the revenues that the project generates may be

recycled into activities contributing to sustainable development. Most research has focused on

the direct contribution of CDM projects. Several methods have been proposed to assess the

sustainable development score of CDM projects (e.g., Thorne and La Rovere 1999; Sutter

2003; The Gold Standard 2006). The consensus in the literature is that energy efficiency and

renewable energy projects tend to make a strong contribution to SD while HFC-23 and N2O

destruction projects have little to no SD impact. Other project areas like landfill gas capture

(LFG) and hydro are debated as to their SD contributions. Beyond the direct contribution,

projects should also be evaluated based on rents used to promote sustainable development.

China has enacted a 65% tax on CERs generated by HFC-23 projects. The revenue is to go into a

fund to finance climate-change related activities. LFG projects also generate revenues that

municipalities could use to improve waste collection services. This secondary SD contribution is

even less documented than the direct SD contribution written in the project documents and

makes the overall contribution of CDM projects to SD arduous to assess.


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CDM and China

To make certain the CDMs contribution to SD in host countries, it is critical that host

nations clearly establish the criteria projects should meet and that investor country

governments and investors are aware of these criteria. China set an example by introducing a

differentiated income tax for HFC and N2O projects because of their low sustainable

development benefits and low costs. Not only does this tax generate revenue for China that

could be used for sustainable development purposes, it also provides incentives to move away

from projects with little or no SD benefits. Some researchers suggested that Annex-I investor

countries could also set an example by only investing in projects that have demonstrated SD

benefits (van Asselt & Gupta, 2009, p. 365).

Sustainable Development Documentation:

The project host country designated national authority (DNA) must approve the

sustainable development component of the project as outlined in the project design document

before it can be registered with the CDM board. Does the letter of approval from the DNA

constitute a sufficient test that the project is contributing to SD? Are stakeholders fairly

consulted? The literature seems to agree that DNA capacity varies widely and it seems doubtful

that many can assess whether the project meets the countrys SD criteria (Beg et al, 2002). The

stakeholder consultation process could also be improved to be more inclusive and provide an

opportunity for more discussion (Lecocq & Ambrosi, 2007).


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3.3 Differing Perspectives on Sustainable Development and the CDM

As previously mentioned,the concept of sustainable development within the CDM can

be seen from different points of view. The following are some possible perspectives vis--vis

sustainable development in the CDM:

The Global Investment Perspective

This perspective includes both the UNFCCC and that of global investment funders. Their

objective is to maximize both the climate change reduction potential and the sustainable

development of a portfolio of CDM investments across the globe (Mathy, S., et al, 2001). SD in

this case would therefore encompass elements which enable geographic distribution across the

developing countries as well as across sectors and technologies. CDM analysis so far has shown

that a small number of developing countries (e.g. China, India, Brazil, Mexico and a few other

countries) could effectively account for almost all CDM projects if there is no concerted effort

to enable other (smaller and poorer) developing countries to access the CDM market (Boyd et

al., 2009). The UNFCCC negotiating text for the Kyoto Protocol recommends an equitable

geographical distribution of CDM projects.

The Bonn Agreement made special mention of the needs of the least developed

countries (LDCs), especially with respect to capacity building. This was later followed up in the

Marrakesh Accords which specifically setup a framework to encourage capacity building in

developing countries and countries with economies in transition (COP7).


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As the CDM is a market-based activity, it is likely to follow the dynamics of foreign direct

investment (FDI) and be constrained by the same forces. However as the CDM has an explicit

goal of promoting sustainable development (unlike FDI), there may be some innovative

investments driven by the sustainable development goals as well as the greenhouse gas

reduction goals.

The Host Countrys Perspective

The Bonn Agreement has specified that the host country is responsible for determining

the sustainable development criteria of CDM projects (UNFCCC). However, few developing

countries have actually done anything concrete in terms of either putting in place the

institutional mechanisms or developing sustainable development criteria for CDM projects. One

of the few countries to have done so is India which has developed the following criteria:

Social well being: The CDM project activity should lead to alleviation of poverty by generating

additional employment, removal of social disparities and contribution to provision of basic

amenities to people leading to improvement in quality of life of people.

Economic well being: The CDM project activity should bring in additional investment consistent

with the needs of the people.

Environmental well being: This should include a discussion of impact of the project activity on

resource sustainability and resource degradation, if any, due to proposed activity; bio-diversity

friendliness; impact on human health; reduction of levels of pollution in general;

Technological well being: The CDM project activity should lead to transfer of environmentally

safe and sound technologies that are comparable to best practices in order to assist inupgradation of the technological base. The transfer of technology can be within the country as

well from other developing countries also (CDM India, DNA Office).


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The Individual Projects Perspective

Each CDM project must be assessed with respect to sustainable development indicators

which apply in a very specific and local context. This includes carrying out appropriate

Environmental Impact Assessments (EIAs) and Social Impacts Assessments (SIAs) as required by

the national laws of each host country. An important consideration is the need for transparency

in making decision. Stakeholders and communities should be involved in decision making

(Baumert, 2002).

Host countries and project developers have approached the issue of defining

sustainable development criteria in diverse ways. In some cases, attempts to develop

sustainability criteria and indicators for specific CDM projects have been made. A few studies

attempting to assess potential SD benefits of CDM projects have shown that CDM projects have

potential for substantially enhancing sustainable development locally and nationally if they are

designed with the SD goals as part of their criteria(Huq & International Institute for

Environment and Development., 2006).

A Development Agencys Perspective

During the negotiation of the CDM, it was agreed upon that it should only support

projects which represent additional resources to those provided by OECD countries under their

Official Development Assistance (ODA). In other words, the CDM should not support

development projects that otherwise would have been funded by ODA. However, given the

development objective of the CDM, the question as to whether development aid should be

used to finance CDM projects has not yet been resolved. It is a difficult question to answer

definitively. However, as one of the objectives of the CDM is to promote sustainable


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development in developing countries, it may be possible for development agencies to fund

certain activities related to the CDM (Cosbey, 2005). These could include capacity building for

least-developed countries who may not be able to attract projects from the private sector

market on their own. In addition it is possible that a part of the CDM market may put a higher

value on the sustainable development elements of certain projects than the price of their CERs.

For example, a private investor may be implanting a social or environmental responsibility

initiative. There is some evidence already from the experience of the World Banks Prototype

Carbon Fund that investors value projects with clear sustainable development benefits higher

than others (World Bank PCF, 2001).

3.4 Host country requirements to ensure sustainable development benefits

from CDM projects

As per the Bonn Agreement, the responsibility for ensuring the sustainable development

objectives of CDM projects rests with the host country. As discussed however, very few

developing countries have been able to establish procedures for screening CDM projects

against their own sustainable development criteria (if they have established any). Most

developing countries have little understanding or institutional capacity to perform a national

level assessment and screening of CDM projects for their sustainable development potential.

Some of the lessons of a 2001 needs assessment carried out by UNITAR in reference to the

CDM, sustainable development, and capacity building are summarized below:

Institutional mechanisms

Host countries for CDM projects need to put in place the requisite institutional

mechanisms for evaluating CDM projects. This requires considerable institutional capacity


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strengthening and training of the main participants as the CDM is a new type of investment

instrument dealing in a new and unfamiliar commodity (CERs). Experience so far has shown that

it often involves a number of ministries (Law, Environment, etc.) as well as other stakeholders.

Compatibility with national sustainable development goals and strategies

After the UN Conference on Environment and Development in 1992, many countries

prepared national strategies for sustainable development (NSSDs). Host countries should

develop criteria for compatibility of CDM projects with their NSSDs.

Monitoring and reporting mechanisms

If sustainable development impacts within the CDM are going to be taken seriously, host

countries also need to ensure adequate monitoring and reporting of each individual project

with respect to its SD indicators and have the capacity to approve and certify compliance with

those indicators (Huq & International Institute for Environment and Development., 2006).

3.5 Applying Sustainable Development Criteria to CDM Projects

A question that arose when attempting to define the sustainable development objective

of the CDM was whether non-Annex-I parties should establish their own standards and criteria,

or whether international standards or rules should be formulated. Most parties agreed that

non-Annex I parties hosting CDM projects are in the best position to evaluate the sustainable

development attributes of projects (UNFCCC 2000). The Marrakech Accords afterwards

affirmed that it is the host Partys prerogative to confirm whether a clean development

mechanism project activity assists it in achieving sustainable development (UNFCCC 2002).


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Non-Annex-I countries can therefore define the sustainability requirements for CDM

projects in their country however they wish. At the same time, most individual countries do not

have the market power to significantly influence the global market price for emission

reductions. Competition in attracting CDM investments may therefore create an incentive to

set low sustainability standards in order to yield more projects with low GHG abatement costs.

This could lead to the aforementioned race to the bottom in terms of sustainable

development standards as non-Annex I parties try to undercut each other to attract CDM

investments. This is another way of stating the clear trade-off between the two objectives of

the CDM cost efficient emission reductions and contribution to sustainable development.

Annex-I countries profit from lax additionality6

requirements as this strengthens the

objective of cost-efficient emission reductions. The current absence of international

sustainability standards in combination with a highly competitive supply side of the CDM is

likely causing a trade-off in favor of the cost-efficiency objective. Neither Annex I countries nor

single non-Annex I parties have direct incentives to apply strict sustainability criteria. It is

therefore vital that designated operational entities (DOEs) and other observers critically

monitor CDM activities to ensure that the SD objective remains meaningful(Sutter & Parreo,

2007).

6Article 12.5(c) of the Kyoto Protocol states that only emission reductions that are additional to any that would

occur in the absence of the certified project are admissible.


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4. Geographic Distribution of CDM Projects

Despite the initial enthusiasm of the CDM as a tool for international development, the

distribution of CDM projects has largely been concentrated in two continents: Asia and Latin

America. Only 2.5% of CDM projects have been established in Africa, and the dominant project

types are HFCs and N2O projects7, with half of all HFC projects located in China (Boyd et al.,

2009, p. 830). A further possible cause of the inequitable distribution of projects has to do with

the complex process of project implementation and the large transaction costs incurred. As

potential hosts of CDM activities, all non-Annex-I countries currently follow the same set of

rules, without any distinction as to their economic or human development characteristics or

national GHG emission patterns (De Lopez, Tin, Iyadomi, Santos, & McIntosh, 2009, p. 439). This

seems egregious given the incredible diversity of both emissions and resources/capacity

7HFC (Hydro fluorocarbons) and N2O (Nitrous Dioxide) are industrial waste gases. They are created and released

in the production of certain refrigerants. Both of these gases are extremely potent GHGs.

CDM Project Distribution UNFCCC CDM

http://cdm.unfccc.int/Projects/MapApp/index.html


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between rapidly developing countries in Asia like China and India; and least-developed

countries like those in Sub-Saharan Africa. As it was anticipated that CDM projects might

gravitate toward a few countries with high greenhouse gasabatement potential, Annex B8

countries agreed in the 2001 Marrakech Accord to help build institutional CDM capacity in the

UN-designated Least Developed Countries (LDC) and Small Island Developing States (AOSIS) (

Bozmoski et al., 2008, p. 20).

According to an expert panel petitioned by the U.S. Government Accountability Office,

the concentration of projects can be explained by two primary factors. First, the relatively large

economies in China and India supply a higher number of emission reduction opportunities in

the form of energy and manufacturing sites. The institutional capacity of these countries is also

developed to the extent that they can handle a large flow of projects. While a source of

criticism, it is important to note that China and India are expected to be the fastest growing and

largest sources of future emissions. The CDM could enhance these countries willingness to

engage in dialogue over international climate change policy. The numerous projects in China

and India could create potential buy-in for further actions that will be needed to reduce GHG

concentration (U.S. GAO).

As a way to highlight sustainable development as a goal for CDM projects, some CDM

analysts have argued for linking CDM sustainability goals with the Millennium Development

Goals (MDGs), a United Nations-backed set of international development goals including the

reduction of extreme poverty, fighting disease epidemics, improving health, etc. For a variety of

8Annex B countries are a subset of Annex I countries. Annex B countries include all developed, industrialized

countries with a GHG Emission Limit (cap).


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reasons, including the general investment climate and institutional capacity; the poorest areas

that MDGs are intended to address repel CDM investment. As a result, about 70 percent of

CDM projects and 75 percent of CERs expected by 2012 are situated in China, India, and Brazil;

while slightly more than 1 percent of CDM projects and less than 3 percent of 2012 CERs are

hosted in sub-Saharan Africa (Alexander Bozmoski et al., 2008, p. 27).

5. CDM Change over Time

Though Article 12 of the Kyoto Protocol set out important principles, the CDM was little

more than empty words after Kyoto. The main operational guidelines of the CDM were not

agreed upon until November 2001, as part of the Marrakech Accords. The process of launching

the CDM was completed in 2003 with the agreement over the rules governing forestry-related

CDM projects (LULUCF).

The CDM turned out to be particularly controversial among the flexibility mechanisms

because it creates new emission credits. The additionality requirement specifies that only

emission reductions that are additional to any that would occur in the absence of the certified

project are admissible. But the counterfactual is impossible to observe, and open to deliberate

manipulations. Since both the buyer and the seller of emission reductions have an incentive to

inflate the baseline and therefore reap more credits, the risks are high that the CDM may create

a major loophole in the Kyoto Protocol and endanger the emissions reductions mandate. The

pressure was thus very strong for the CDM to prove beyond a doubt that it was

environmentally additional. This had two major consequences. First, it was decided that

additionality would be tested on a project-by project basis, and not at the program level as


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some had originally envisioned. Second, the Executive Board (EB) of the CDM took a very

conservative approach to the validation of emission reductions. The balance between the

climate change mitigation and development objectives of the CDM was the subject of intense

discussions. Of particular importance was the distribution of rents between the North and the

South: the risk was that the North would purchase emission reductions cheaply by harvesting

low-hanging fruits from the South (Hourcade and Toman 2000). It was eventually agreed that

it would be left to the host country to determine whether a particular CDM project is

compatible with its sustainable development priorities (Lecocq & Ambrosi, 2007). As this study

illustrates, the debate over the relationship between the CDM and sustainable development is

far from over.

There is some evidence that the quality of projects in terms of development will

increase as the number of cheap, low-hanging fruit projects decrease. Current data have

begun to show a decrease in industrial gas projects and an increase in renewable energy and

energy-efficiency projects, which have the potential to confer long-term sustainability benefits.

However, given the CDMs market-based design encourages its participants to pursue low-cost

projects, it may ultimately be difficult for the CDM, as currently structured, to make significant

contributions towards sustainable development goals(U.S. Government Accountability Office).

Fast Growing Market

The growth of the CDM market can be seen in the annual number of projects submitted

for validation. This number has grown exponentially from 5 in 2003 to 58 in 2004, 491 in 2005,

and 676 in the first three quarters of 2006 (Fenhann 2006). Overall, a total of 2062 projects


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totaling some 2400 MtCO2e

have been registered as of the

end of 2008 with an additional

2000+ in various stages of

design or validation (UNFCCC).

See Appendix, Figure 2 for

current project totals and

status and Figure 3 for a breakdown by project category.Another indication of the rapid growth

of the CDM market is the number of CERs issued. The chart at right from the UNEP RISO Centre

shows the growth of total expected accumulated CERs by 2012. It also illustrates the plateau of

industrial HFC and N20 destruction projects as a percentage of total CERs. Recently the growth

of CDM projects has slowed given the uncertainty surrounding the global climate change

framework post-2012.

6. Institutional Analysis of the CDM

Given the background laid out in Sections 1-5 above, it is clear that the regulatory,

political, and economic complexity of the CDM make it a difficult subject for simple analysis.

Using the tools of institutional and policy analysis, the following sections bravely attempts to

uncover the underlying reasons behind the CDMs poor performance in regards to its

sustainable development objective.

6.1 CDM and Transaction Costs

The CDM functions as an offset system that allows emitters to purchase trading rights

from outside the regulated group (Annex-I) from a project developer who undertakes an


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activity to reduce emissions against business as usual activities. Tom Tietenberg and others

when reviewing other emissions trading schemes like the U.S. Clean Air Act cautioned against

offset and crediting programs. Their study found these programs contained rigid procedural

requirements for reporting and approval by authorities that turned trades into rule-making

events. The report concluded that the U.S. history of credit trading demonstrated the tension

between the need for high levels of government oversight to ensure credit trades are

legitimate, and the high to very high transaction costs such oversight details(Tietenberg, Grubb,

Michaelowa, Swift, & Zhong Xiang Zhang, 1999).

More recent studies have come to similar conclusions that transaction costs were

excessive yet necessary to prevent paper reductions.

6.2 Stakeholder Analysis

Stakeholder

Group

Interest

Level In

GHG

Reductions

Interest Level

In Sustainable

Development

benefits

Resources Capacity to

Mobilize

Position on CDM

Reform to

include more SD

measuresAnnex-I High Medium High High Negative

Project

Investors

High

(produces

more CERs)

Low

(higher cost)

High High Negative

China, India,

Brazil

Medium High High Medium Neutral

Lesser

Developed

Countries

Low High Low Medium Positive

NGOs High High Medium Medium Positive

Local Project

Participants

Low High Low Low Positive


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The stakeholder analysis shown in the table above compares those groups most

involved in the CDM: how they view its two primary objectives; how capable they are of

mobilizing resources; and whether their position on CDM reform is negative or positive. The

analysis shows that the most powerful actors are much more concerned with reduced GHG

emissions than with promoting sustainable development benefits in host countries. Less

powerful actors including NGOs, local project participants, and project host countries (including

least developed countries) are aligned in favor of reform in the CDM to support the sustainable

development objective. Annex-I countries and project investors are less concerned with

sustainable development and negative on any CDM reform that would lead to a less efficient

outcome in terms of GHG emissions reductions. Of particular interest are the emerging

economies of China, India, and Brazil. Expected to be the highest generators of GHG emissions

in the coming years, these nations are garnering significant investment form the CDM as

currently established. With more projects and thus more experience, these nations have also

developed higher capacities to engage with project developers and the CDM regulatory

apparatus. As exemplified by Chinas sustainable development levy on industrial gas projects

and Indias stricter SD criteria for project approval, these countries are finding ways to benefit

from the CDM without pushing for significant reform. Stakeholder support will be critical for

any attempts to significantly alter the CDM. As China, India, and Brazil gain more and more

projects, lesser developed Non-Annex-I nations may find themselves without the leadership

and resources to push for anything but gradual reforms in favor of the CDMs SD objective.


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6.3 CDM Additionality and Sustainable Development

A core requirement of CDM project approval is that it passes the additionality test. A

project that would have occurred without the CDM will not be approved because the CDMs

purpose is to efficiently reduce overall emissions, not to subsidize business as usual

development. Many sustainable development projects, especially those focused on renewable

energy, offer economic benefits and probably do not need CERs to make them attractive to

developers (Boyle, Kirton, Lof, & Nayler, 2009, p. 20). Those who are concerned about the

additionality requirement are increasingly questioning the growing number of sustainable

energy projects in the CDM pipeline. Others are advocating that the additionality requirement

is too stringent; it is both difficult to prove and costly to monitor. This trend has the possibility

to compromise the environmental integrity of the mechanism going forward.

6.4 One Instrument for Multiple Goals

As previously mentioned in the introduction, the CDM was a last minute compromise

between developed and developing nations.

As often happens in international negotiations, the agreed text left many ambiguities

unresolved. First, parties differed in their interpretation of the new emphasis on

development. Most developed countries still viewed the CDM as a way to gain access to

cheap mitigation opportunities in developing countries, and thus to reduce their

mitigation costs. But developing countries were looking at the CDM as a new channel for

development assistance. These two interpretations of the CDM are not necessarily

compatible (Grubb et al. 1999).

As it is primarily structured as a market mechanism, is the CDM an appropriate

mechanism to achieve other objectives besides efficient GHG reductions? The CDM is one

policy instrument chasing two primary objectives. Economist Jan Tinbergen set forth the


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principle that for every independent policy goal we must have an independent policy

instrument (Tinbergen, 1958). In other words, it is very difficult to hit two birds with one

stone. This criticism can be applied to the CDM because as stated previously, the evidence

suggests that the CDM as currently designed is unable to achieve both of its objectives (efficient

emission reduction and contributions to sustainable development). The inherent trade-offs

between the two objectives results in either a lackluster contribution to sustainable

development or lowered environmental integrity of the mechanism and excessive transaction

costs.

7. Problem Statement and Research Question

Article 12 of the Kyoto Protocol requires the CDM to promote sustainable development

in project host countries. Evidence suggests that this mandate is not being implemented

effectively because of the incentive structure of the offset market, which favors the lowest

cost/highest CER projects. Given that the sustainable development goal of the CDM is vital to

the political consensus in the UNFCCC, how can the incentive structure of the CDM be reformed

so more projects promote sustainable development? Can incentives be modified to encourage

more geographic diversity in CDM projects? Can this be done while still maintaining the

environmental integrity of the mechanism?

7.1 Current Reforms

Recognizing some of the problems of the CDM, the UNFCCC has instituted reforms

including those below:


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1.Adaptation Levy- 2% on revenues from the sale of Certified Emissions Reductions paid into

an adaptation fund for particularly vulnerable countries (levy not applied to LDC country

projects).

2. Nairobi Framework initiative aimed at building CDM capacity in lesser developed nations.

The Framework consists of five objectives considered to be key priority targets in order

to move the CDM forward in the beneficiary countries:

Build and enhance capacity of DNAs to become fully operational

Build capacity in developing CDM project activities Promote investment opportunities for projects

Improve information sharing/outreach / exchange of views on activities / education and

training

Inter-agency coordination.

All agencies that are currently partner to the Nairobi Framework make a concerted

effort to provide assistance to sub-Sahara African countries to enable them to identify, develop,

submit and process CDM projects that will eventually lead to a considerable increase in CDM

penetration in the region. As part of these activities, the agencies have agreed to join forces to

map the CDM potential in sub-Sahara Africa (by country and key sector), taking into account

the emission reduction potential of each sector as well as the various barriers. This mapping

should be a helpful tool for potential investors (Nairobi Framework).

3. Programmatic CDM - Aggregation of individual projects to reduce transaction costs and give

more incentives to undertake smaller projects. Most experts in the literature approve of the

programmatic approach because it helps to promote projects that may result in significant GHG

emissions reductions and SD benefits but are not viable on an individual basis.An example


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would be a program that provides energy-efficient light bulbs to a significant number of

households. Bundled together, the transaction costs would be distributed over a group of

activities. Initial evaluation of Programmatic CDM show it to be challenging to design a

methodology to verify emission reductions on a programmatic scale - it may be difficult and

costly to take a sample of households in order to demonstrate that issued light bulbs are being

used and emission reductions are achieved (U.S. GAO).

7.2 Possible Policy Alternatives

A project that does not contribute to SD does not pursue one of the goals of the CDM,

and should therefore not be eligible to receive CERs. Evaluating the CDMs project cycle,

Alexander Bozmoski, a researcher concerned with risk perception in carbon markets, points out

how the sustainable development aspect of CDM projects is not treated with the same

seriousness as the emissions reductions requirement.

Within this project cycle, the sustainability requirement of the CDM is satisfied in two

steps. First, at the outset, the hosting country (through what is termed a designatednational authority) issues a letter of approval confirming that the project design con-

forms to a set of criteria established by the country. However, the designated national

authority is sometimes just one officer. In such cases, the responsibility of deciding

whether to grant country approval for a CDM project, which includes judging whether

the project contributes to sustainable development, sometimes falls squarely to a single

government official. Second, before a project can be approved by the CDM Executive

Board, a separate firm (called a designated operational entity) must validate the

project, including its contribution to sustainable development (as defined by the host

countrys designated national authority). It is only in these first two phases in the projectcycle that the sustainable development requirement is actually considered.After these

early stages in the project cycle, which can last many years, there is no verification or

monitoring process for the sustainable development component. Thus, while emissions

reductions are painstakingly measured and monitored and their global effect accounted

for, fulfilling the sustainable development requirement is often limited to bureaucratic


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formality, hampered further by a multiplicity of competing scales of governance (

Bozmoski et al., 2008, p. 27).

As only the carbon benefits are valued on the carbon market, there is a failure to

recognize and respond to or promote the non-carbon benefits of CDM projects. There are three

possible ways of dealing with this dilemma:

1) Let the CDM do what it is doing well act as a market mechanism to achieve GHG reductions

cost effectively and leave the achievement of other objectives to other instruments, such as

multilateral funding mechanisms.

2) Focus the CDM much more towards other objectives, including its contributions to SD, the

transfer of clean energy technologies, and an equitable geographical distribution. Projects that

contribute to these goals will be prioritized and projects not likely to contribute will be

excluded.

3) The CDM could continue to be gradually fine-tuned to achieve various objectives

simultaneously.

Below are some possible avenues for policy reform of the CDM that that fit into one of

the above three groupings:

1. Adjust the price of CERs to better align incentives with development priorities (CDCF)

Put a price premium on CERs from renewable energy projects in Least Developed

Countries. This would make more development-friendly projects competitive with industrial gas

projects in China (Del Ro, 2007). The premium could come from dedicated carbon funds or

developed country governments.


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Strength: Putting a price on sustainability will give incentives for project investors to finance

and develop more geographically diverse projects that are focused towards energy efficiency

and renewable energy.

Weakness: How to decide the price premium if it is set too high, it could lead to problems

with additionality and hurt the environmental integrity of the CDM. It is difficult to measure

local SD co-benefits in monetary terms.

2. Assign Quotas for high sustainability projects or country quotas to spread the geographic

distribution of projects (CDCF)

Establish minimum quotas for high sustainability projects. Furthermore, all or several

Annex-I countries could commit themselves to purchasing a minimum quota of projects with a

high level of sustainable development benefits (Olsen, 2007).

Strength: Increased number of projects with high-sustainability benefits.

Weakness: Fewer projects with high emissions reductions.

3. SD Certification - Sustainability Labeling (Gold Standard)

Certify CDM projects as contributing to sustainable development. Several independent

CDM Project Assessment entities have arisen to certify CDM Projects for their sustainable

development impact. Some popular examples of current sustainability labeling are: Gold

Standard Certification (GS-CERs) and the SouthSouthNorth Matrix Tool.

Strength: Increased visibility of sustainability goal through project branding. Allow investors to

profit from status/image accompanying sustainability certification.


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Weakness: Boutique and possibly expensive sustainability. The need for more validation and

monitoring may significantly increase project costs. Likely to only impact a small niche of

projects.

4. Establish a Clean Development Fund

Many climate change policy experts view any post-Kyoto agreement as including wider

developing country participation in national targets. They argue convincingly that it isnt

feasible to try to achieve the stated UNFCCC goals without involving some of the largest

emitters including China in the binding-target system.9Seeing the CDMs mixed results to date,

especially in the SD realm, it has been further argued that it should be transitioned so the

major-emitter projects are included under the Joint Implementation mechanism (major

developing countries like China would no longer be eligible for CDM projects) while SD for low-

emitting countries is addressed with a Clean Development Fund (Boyle et al., 2009). Similar

to the Montreal Protocol Fund10

, which was structured more as a concession and fund-granting

mechanism rather than an offset system; this new fund would be geared exclusively towards

public policy goals related to sustainable development and climate change mitigation. For

example, it could be targeted at low-carbon infrastructure development with poverty reduction

co-benefits in Least Developed Countries.

Strength: Two policy instruments for two separate objectives will eliminate the trade-off

problem.

997% of the global increase in energy-related emission to 2030 is expected to come from developing countries like

China, India, and several Middle Eastern nations.10

The Multilateral Fund of the Montreal Protocol was established to pay the agreed incremental costs of

developing country compliance with this agreement the cost of changing from ozone-destroying to ozone-

friendly technologies.


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Weakness: JI is not near the size or capacity of CDM currently. Major institutional changes

would be necessary to accommodate the Clean Development Fund.

The Need for Capacity Building and Governance Reform of CDM Structure

All of the above alternatives would result in better outcomes with continued reform of

the CDM towards good governance principles including societal participation, impartial rule of

law, transparency, responsiveness to stakeholders, equity and efficiency, accountability, and

consensus orientation. Projects should better reflect the proper balance of costs and benefits

to development goals as perceived by all stakeholders (investors, project developers,

communities, civil society, etc.).

Conflict is difficult to avoid given the range of competing scales of governance: CDM

projects are usually initiated at an international level, approved for their contribution to

sustainable development at the national level, verified and monitored again at the international

level, and implemented at the local level. Evidence suggests that scale is rarely explicitly

considered in the CDM. The capacity required to facilitate this extensive cooperation and col-

laboration is out of reach for many developing countries. Scale complications with decision

making and assessment, as manifest in problems of accountability and responsiveness, can help

to explain why the CDMs greenhouse gas mitigation objective has eclipsed the sustainable

development objective (Emily Boyd, 2009).

Some of the policy reform options above entail a departure from a market mechanism

to one that relies less on the private sector and more on government officials. The possibility

exists for a conflict of interest as officials could be prone to bribery and corruption. Thus, there


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is a continued need for both human and institutional capacity to building to ward off possible

threats to a reformed CDM.

8. Summary of Background and Policy Alternatives

In its review of the CDM, the U.S. Government Accountability Office was relatively

pessimistic on the future potential of CDM projects to confer long-term sustainability benefits.

Going forward, many believe the quality of projects will increase as the number of

cheap, low-hanging fruit projects decreases. Indeed, current project trends have

shown an increase in renewable energy and energy-efficiency projects, which have the

potential to confer long-term sustainability benefits, and a decrease in industrial gas

projects. However, given that CDMs market-based design encourages its participants topursue low-cost projects, it may ultimately be difficult for the CDM, as currently

structured, to make significant contributions toward sustainable development goals

(U.S. GAO, 2008, p. 50).11

The literature shows that left to market forces, the CDM does not significantly

contribute to sustainable development. It does not drive SD and does a poor job of funding

renewable energy projects with high development co-benefits (Pearson, 2007). Turning this

argument around, the real problem is that the CDM works rather well in achieving its mandate

to produce the lowest-cost emissions reductions. Because SD benefits are left out of the

market, they remain only rhetorical, non-monetized and play a limited role in producing

incentives for investors or projects. The main policy implication is how to respond to the fact

that left to market forces; the CDM does not significantly contribute to SD in developing

countries (Olsen, 2007).

11The GAOs key takeaways from its study of the CDM include: (1) the resources necessary to obtain project

approval may reduce the cost-effectiveness and quality of projects; (2) the need to ensure the credibility of

emission reductions presents a significant regulatory challenge; and (3) due to the tradeoffs with offsets, the use of

such programs may be, at best, a temporary solution.


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From a purely pragmatic point of view, it is tempting to ignore the CDMs sustainable

development mandate and focus on its success as a policy instrument for efficiently lowering

GHG emissions. This narrow view, however, misses the political implications. The legitimacy of

the CDM going forward in the post-2012 era when the first phase of Kyoto ends is dependent

on broad-based support from a diverse set of stakeholders including developing countries.

Nathan Hultman, a climate change policy expert, sums this up below:

Divorcing sustainable development from the CDM would remove incentives for broad-

based participation. International policy history underscores the importance of policies

that command confidence of a majority of countries, both developed and developing.

Ensuring broad-based participation in climate governance requires that the overallarchitecture be perceived as fair and beneficial to the development goals of all countries.

At the same time, structural reforms should respect the preliminary success of the CDM

in stimulating market innovations. Enhancing sustainability in the international climate

protection architecture is a critical element in policy that will encourage the parallel,

differentiated actions needed to protect our common future (Hultman, 2009, p. 122).

Taking Hultmans analysis seriously, this study will analyze the proposed policy reforms

to find the best route to both maintaining the environmental integrity of the CDM while

ensuring sustainable development is given the same attention in project design and

implementation as it is in Article 12 of the Kyoto Protocol.

9. Methodology

9.1 Policy Evaluation

Ex-ante evaluations will be made of proposed alternatives to reform the CDM to

strengthen its SD objective. In some cases, data will be used from proxy sources that mirror

proposed alternatives. For example, valuing credits from projects with high SD co-benefits more

than others is similar to current practice of the Community Development Climate Fund. Using a


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multi-criteria assessment of the options, this analysis will seek to find the alternative that best

achieves the CDMs two primary objectives: helping Annex-I countries comply with their

emissions reductions commitments and assisting developing countries in their sustainable

development goals, while also contributing to stabilization of greenhouse gas concentrations in

the atmosphere.

The key tools used for evaluation will be program theory models and a content analysis

of Project Design Documents (PDDs) to assess sustainable development impacts of similar

initiatives. An outcomes matrix will be used to evaluate the results.

9.2 Sustainable Development Measurement

Sustainable development is not defined by the Kyoto Protocol but the generally quoted

UN definition is a development strategy that meets the needs of the present without

compromising the ability of future generations to meet their own needs.12

This definition is

wide enough to encompass environmental, social, economic, and political sustainability. The

CDM does not provide any overarching SD standards. It is up to each host nation and its

Designated National Authority to evaluate the SD benefit of projects. Some countries like India

have defined SD criteria which they can use to assess the SD benefits of potential projects.

Other DNAs whose nations lack formal SD criteria are left to apply an abstract concept to a

concrete project. This discrepancy is reflected in the Project Design Documents. Whereas all

projects must describe the SD contribution of the project, some do so in a systematic way while

others write a vague paragraph indicating the GHG reductions that will take place due in the

12defined at World Commission on Environment and Development in 1983


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course of the project. Of course, if no GHG reductions were to take place, the project would not

even be considered for registration under the CDM.

Attempts to measure Sustainable Development

Several studies have attempted to quantify and measure the SD impact of CDM projects

based on type and size (Nussbaumer, Olsen, Development Dividend, Sutter and Parreno). Using

Multi-Criteria Analysis and other tools, these studies have generally shown what was logically

intuitive smaller-scale projects focused on renewable energy and energy efficiency have a

greater impact on SD than large gas capture projects.

9.3 Program Theory of Change Analysis

Program Theory models are logic-based outcome diagrams that demonstrate a

programs casual chain of activities leading towards desired outcomes and any key

assumptions. Using Program Theory models for each alternative will aid in evaluation and

discussion of how the selected criteria react to reform options. The steps on the diagrams that

follow are color-coded to indicate whether the activity or outcome is associated with GHG

emissions reduction (blue) or sustainable development (green). Grey-colored boxes are

administrative or process steps that all CDM projects are required to complete. By comparing

the structure of the alternative programs to the CDM Status Quo, one can see the changes in

emphasis alternatives place on sustainable development within the program design.


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1. CDM Project Status Quo

Implementation, Monitoring,

Verification of GHG reduction

b DOEs

GHG reduction goal met through

project. SD objective outcomeunknown.

Issuance of CERs

Sustainable Development

benefits not monitored or

validated

Assumptions:

Host country has established

SD criteria for the DNA to

measure project against

DNA has capacity/resources to

analyze SD impacts

Additionality requirement not

biased against projects with

high SD impact

Market mechanism doesnt

lower incentives for SD in

projects

Projects will be equitably

distributed geographically

Unverified SD impactSpecified GHG Reduction

Investor and host country

agree to undertake project

Host Country DNA approves SD

impact of project

GHG baseline measuring

methodology decided

Barrier Analysis Conducted to

assess additionality of project

Project is approved by CDM EB


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The Program theory outlined on the preceding page shows in graphical form what has

been argued in the literature the sustainable development goal of the CDM is not monitored

or validated and thus the SD impacts of projects are unknown. An important assumption about

DNA capacity and resources to evaluate sustainable development impacts of projects is not

taken into account nor is the incentive to attract project developers by offering the least-

expensive cost/highest CER output project available. Geographic distribution is biased towards

India and China because of their more developed capacities, higher number of potential large

project sites, and project-developer familiarity.


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2. Sustainability Certification (Gold Standard)

GHG reduction goal met and

verifiable SD impact made.

Issuance of GS CERs

Assumptions:

Host country has established

SD criteria for the DNA to

measure project against

Added costs of SD Assessment

and Monitoring will not make

projects uncompetitive

Projects will be equitably

distributed

Specified GHG Reduction

Implementation, Monitoring,

Verification of GHG reduction

Project is approved by CDM EB

Host Country DNA approves SD

impact of project

Investor and host country agree to