law environment and developmentjournal · environment and development journal 6/1volume ... 2.1 the...

LEADLawEnvironment and

DevelopmentJournal

VOLUME

61

IMPROVING OR DISPROVING SUSTAINABLE DEVELOPMENT IN THE CLEANDEVELOPMENT MECHANISM IN THE MIDST OF A FINANCIAL CRISIS

Angus Macdonald

ARTICLE

LEAD Journal (Law Environment and Development Journal)is a peer-reviewed academic publication based in New Delhi and London and jointly managed by the

School of Law School of Oriental and African Studies (SOAS) - University of Londonand the International Environmental Law Research Centre (IELRC)

LEAD is published at wwwlead-journalorgISSN 1746-5893

The Managing Editor LEAD Journal co International Environmental Law Research Centre (IELRC) International EnvironmentHouse II 1F 7 Chemin de Balexert 1219 Chacirctelaine-Geneva Switzerland Telfax + 41 (0)22 79 72 623 infolead-journalorg

This document can be cited asAngus Macdonald lsquoImproving or disproving sustainable development in the

Clean Development Mechanism in the midst of a financial crisisrsquo61 Law Environment and Development Journal (2010) p 1available at httpwwwlead-journalorgcontent10001pdf

Angus Macdonald LLM Student The School of Oriental amp African Studies (SOAS) Thornhaugh StreetRussell Square London WC1H 0XG United Kingdom Email Angushcmacdonaldyahoocouk

Published under a Creative Commons Attribution-NonCommercial-NoDerivs 20 License

ARTICLE

IMPROVING OR DISPROVING SUSTAINABLE DEVELOPMENTIN THE CLEAN DEVELOPMENT MECHANISM IN

THE MIDST OF A FINANCIAL CRISIS

Angus Macdonald

TABLE OF CONTENTS

1 Introduction 3

2 Background to the Clean Development Mechanism (CDM) 321 The CDM ndash A Brief Explanation 322 The Rationale of Proposing the CDM 4

3 Sustainable Development in the CDM 631 Sustainable Development in the CDM - an introduction 632 Sustainable Development as a Positive Externality 833 The Problems of Defining Sustainable Development 9

4 Examples of CDM projects 1041 HFC-23 Destruction and lsquoEnd of Pipersquo Projects 1042 Renewable Energy Small Scale Community and

Energy Efficiency Projects 1243 The Location of CDM Projects 13

5 Improving the lsquoDevelopment Dividendrsquo of the CDM 15

6 The Economic Crisis and its Effects on the CDM 17

7 Conclusion 19

1INTRODUCTION

As the Clean Development Mechanism (CDM) hasevolved it has become clear that it presents developedand developing countries with opportunities Theformer can hope for a cheap way to meet theirobligations under the Kyoto Protocol whilst thelatter see the CDM as a tool for promoting sustainabledevelopment and technology transfers Despite thesehigh hopes there are doubts surrounding the CDMThis paper will seek to examine some of the positiveand negative aspects of the mechanism during its brieftime in operation with a particular focus on sustainabledevelopment Although generally developed countriesseem to be benefiting from the CDM which enablesthem to secure cheaper emission reductions the effectson non-Annex I countries will be explored in moredepth Whether developing countries are benefitingfrom the CDM is a crucial point in evaluating thelong term efficacy and viability of the mechanismThe paper discusses sustainability issues regardingCDM projects and whether these projects really docontribute to sustainable development by puttingdeveloping countries on a path to consume lesscarbon in the future Finally the achievements andproblems of the CDM are discussed in the context ofthe financial crisis Reforms that might help theCDM function more effectively are suggested butthe difficulties in pursuing these reforms bring intoquestion the very existence of the CDM in the future

2BACKGROUND TO THE CLEANDEVELOPMENT MECHANISM (CDM)

21 The CDM ndash A Brief Explanation

The CDM was established under the Kyoto Protocol1It is one of the three flexibility mechanisms along

with joint implementation2 and emissions trading3designed to make it easier for industrialised countriesto meet their emission reductions obligations4 Theadoption of the CDM came relatively late in thenegotiating process5 and has been dubbed the lsquoKyotosurprisersquo6 The surprising late inclusion of the CDMbelies its now important role in the climate changeframework CDM allows Annex I countries toinvest in projects in non-Annex I countries Theseprojects should mitigate climate change by reducinggreenhouse gas emissions in the host country andalso contribute to sustainable development7Industrialised countries can then acquire tradablecertified emission reductions (CERs) equivalent toone tonne of CO2 based on the project Thesecontribute to their compliance with their reductioncommitments8 If Annex I countries help to reduceemissions in a developing country they should getcredit in the form of CERs

A share of the money generated from CDM is usedto cover administrative expenses and two per centof CDM profits are paid into an adaptation fund toassist countries most at risk from climate change9Although the market might reduce in size becauseof the current financial crisis the CDM is still amajor part of the climate change regime worth $3billion per year and will it is claimed avert a totalof 18billion tonnes in greenhouse gas emissions by201210 It is the main way in which developingcountries can participate in the climate changeregime It is seen as a stepping stone towards thosecountries taking on binding emission reductioncommitments in the future

Law Environment and Development Journal

3

1 See Kyoto Protocol to the United Nations FrameworkConvention on Climate Change Kyoto 11 December1997 37 Intrsquol Leg Mat 22 (1998) Article 12

2 Id Article 63 Id Article 174 Id Article 35 JWerksman lsquoThe Clean Development Mechanism

Unwrapping the lsquoKyoto Surprisersquorsquo 72 Review ofEuropean Community and International EnvironmentalLaw 147 (1998)

6 Remarks by Ambassador Raul Estrada y Oyuela FromKyoto to Buenos Aires Technology Transfer andEmissions Trading Conference held at ColumbiaUniversity New York 24 April 1998

7 See Kyoto Protocol to the United Nations FrameworkConvention on Climate Change Article 12(2)

8 Id Article 12(3)(b)9 Id Article 12(8)10 lsquoKyoto Protocol lsquoloopholersquo has cost $6billionrsquo

New Scientist 9 February 2007 available at httpwwwnewscientistcomarticledn11155

22 The Rationale of Proposing theCDM

Industrialised countries have undertaken legallybinding commitments to reduce their emissions ofgreenhouse gases by an average of five per centcompared to 1990 levels11 That developed countriesshould shoulder greater responsibility in cuttinggreenhouse gas emissions as opposed to developingcountries was justified as fair because of thehistorically high level of emissions that industrialisedcountries had been responsible for This wasencapsulated in the principle that states havelsquocommon but differentiated responsibilitiesrsquo12

Furthermore developed countries have better accessto finance technology and resources that enablethem to cut emissions It seemed unfair to askdeveloping countries to agree to binding targetswithout similar access to resources The CDM wasinitially thought of as lsquoa limited safety valve foroverburdened industrialised countriesrsquo13 amechanism allowing Annex I countries to ameliorateany hitherto insufficient reduction efforts withreductions in developing countries The inclusionof CDM along with other flexibility mechanismsallowed industrialised countries to commit to morerigorous environmental targets than they mightotherwise have agreed to14 As well as givingdeveloping countries a helping hand towardssustainable development there was also this carrotof cheaper emission reductions for industrialisedcountries which was a useful stick in persuadingthose developed countries to adopt more ambitious

targets That there are advantages for Annex I andnon-Annex I countries alike makes the CDMpotentially an important and ingenious part of theinternational climate change regime

The Kyoto Protocol and the CDM confirmed thatclimate change was a lsquoglobal problemrsquo requiringinternational action and reductions15 This globalproblem where emissions from any country causeclimate change means it is less important wherereductions take place lsquoas location of abatementmeasures is climatically irrelevantrsquo16 Another bigissue affecting the compliance cost of industrialisedcountries is where those mitigation measuresoccur17 The location of emission reductions isimportant as it impacts on costs which are usuallyhigher in industrialised countries Therefore itmakes economic sense for emission reductions tooccur where they are cheapest usually in non-AnnexI countries The CDM aims to facilitate these cheapreductions

The long term effect of reductions in developingcountries resulting in different historical pathwaysof development and thus further reductions is alsoimportant18 It is imperative that emissionsreductions are coupled with the need to addressclimate change A differentiation should be madebetween these two aims as if one is achieved it doesnot axiomatically follow that the other occurs too19

Supporting emission reductions alone and discussinglittle in the way of climate change mitigation is notthe best way to proceed Realistically a lsquovariety of

The Clean Development Mechanism

4

11 F Yamin F lsquoThe Kyoto Protocol Origins Assessmentand Future Challengesrsquo 72 Review of EuropeanCommunity and International Environmental Law 113-127 (1998)

12 Rio Declaration on Environment and Development inReport of the United Nations Conference on Environmentand Development Rio de Janeiro UN Doc ACONF15126 (Vol I) Annex I (1992) Principle 7

13 HJ Luhmann and W Sterk Climate Targets ndash Shouldthey be Met at Home or Where they are Cheapest ThelsquoClean Development Mechanismrsquo as Generator ofInvestment from Inside the Climate Change Regime 3(Washington DC Friedrich Ebert Stiftung InternationalPolicy Analysis 2008) available at httplibraryfesdepdf-filesidipa05468pdf

14 FYamin The International Climate Change Regime AGuide to Rules Institutions and Procedures 136(Cambridge Cambridge University Press 2004)

15 KA Baumert lsquoParticipation of Developing Countriesin the International Climate Change Regime Lessons forthe Futurersquo 38 George Washington International LawReview 365 369 (2006)

16 See Yamin note 14 above at 13617 Id18 B Metz ed Climate Change 2007 Mitigation of Climate

Change Contribution of Working Group III to the FourthAssessment Report of the Intergovernmental Panel onClimate Change 700-701 (Cambridge CambridgeUniversity Press 2007)

19 See eg Driesen cites an example where an HFC 23project reduces emissions cheaply but fails to delivermany sustainable development benefits for the futureSee DM Driesen lsquoSustainable Development and MarketLiberalismrsquos Shotgun Wedding Emissions Trading Underthe Kyoto Protocolrsquo 83 Indiana Law Journal 21 22-25(2008)

approachesrsquo including but not limited to reducingcarbon emissions is crucial20 In terms of the CDMpursuing climate change mitigation as well asemission reductions this should mean promotingsustainable development and changing thosepathways of development as well as reducinggreenhouse gas emissions The decarbonisation ofdevelopment pathways is crucial21 At this junctureit is sufficient to say that emissions reductions alonewill not solve the problem Mitigation adaptation22

and sustainable development are also key

The claimed positive effects of the CDM ondeveloping countries are an important part of theinternational climate change jigsaw Whist non-Annex I countries should lsquobenefit from projectactivitiesrsquo23 there is little elaboration in the KyotoProtocol on this Two supposed benefits areconsidered below Firstly a reduction in emissionsif additional24 should benefit the local and globalenvironment Secondly if non-Annex I countries willtruly benefit from project activities CDM projectsshould contribute to sustainable development Thereare concerns that some projects do little to contributeto sustainable development in CDM host countriesAs alluded to by Driesen and others25 HFC-23

destruction and lsquoend of pipersquo projects fail tocontribute much positively to the society where theproject is based Much literature has suggested thatCDM effects on non-Annex I countries are notpositive in sustainable development andenvironmental terms26 with the CDM criticised forits lsquopoorrsquo performance27 and some CDM projectsregarded as lsquoscamsrsquo28 The CDM has been dismissedas lsquodesigned to help the rich and not to assist thepoor to achieve sustainable developmentrsquo29 Thebetter view is perhaps not to view the CDM in zerosum terms particularly since climate change is aglobal issue requiring global solutions This paperwill evaluate whether such harsh criticism is justifiedparticularly in regards to the charge of failing topromote sustainable development

It is worth briefly mentioning some advantages ofthe CDM Whilst it will be shown that concernsover some specific projects such as HFC-23destruction are warranted it is unfair to maintainthat non-Annex I countries have not benefited at allfrom CDM projects The most obvious advantageis that emission reductions have occurred30


5

20 DM Driesen lsquoLinkage and Multilevel Governancersquo 19Duke Journal of Comparative amp International Law 389411 (2009) See also the Multifaceted lsquoSilver BuckshotApproachrsquo advocated by Prins and Rayner G Prins andS Rayner The Wrong Trousers Radically RethinkingClimate Change Policy 26-27 (Oxford James MartinInstitute for Science and Civilization 2007)

21 This is discussed in more details in the lsquosustainabledevelopment in the CDMrsquo section below

22 See eg Prins and Rayner note 20 above at 35-3723 See Kyoto Protocol to the United Nations Framework

Convention on Climate Change note 1 above Article 12(3)(a)24 It is beyond the scope of this paper to consider

additionality in depth but for a good summary of theissues regarding additionality see A MichaelowalsquoDetermination of Baselines and Additionality for theCDM A Crucial Element of Credibility of the ClimateRegimersquo in FYamin ed Climate Change and CarbonMarkets A Handbook of Emission Reduction Mechanisms289 (London Earthscan 2005)

25 See Driesen note 19 above See also O SchwankConcerns about CDM Projects Based on Decompositionof HFC-23 Emissions from 22 HCFC Production Sites1 (Zurich INFRAS 2004) lsquoKyoto Protocol lsquoloopholersquohas cost $6billionrsquo note 10 above and M Wara lsquoIs theGlobal Carbon Market Workingrsquo 445 Nature 595-596(2007) Prins and Raynernote 20 above at 30-31

26 See eg L Schneider Is the CDM Fulfilling itsEnvironmental and Sustainable Development ObjectivesAn Evaluation of the CDM and Options forImprovement 72 (Berlin Oko-Institut Report Preparedfor WWF 2007) and Baumert note 15 above at 387-389

27 See Driesen note 20 above at 40628 See Prins and Rayner note 20 above at 3129 Centre for Science and Development in India as quoted

in A Ruumlck and C Bals The Role of DevelopingCountries in the Climate Change Regime Voices fromthe South Comment on Climate and Development Issues(Germany Germanwatch Working Paper Number 161999) available at httpwwwgermanwatchorgrioap16htm4

30 UNFCC Expected Average Annual CERs fromRegistered Projects by Host Party 30 October 2009available at httpcdmunfcccintStatisticsRegistrationAmountOfReductRegisteredProjPieCharthtml Whilstcommentators might dispute some of these CERs itseems unduly pessimistic to insist that none have helpeddeveloping countries environmentally by for exampleintroducing a new renewable energy project of whichthe CDM has a significant number see UNEP RisoeCentre Percentage Share of the Total Number of Projectsof Four Largest CDM Categories in Numbers UNEPRisoe CDMJI Pipeline Analysis and Database 1 October2009 available at httpcdmpipelineorgcdm-projects-typehtm3

although academics who dispute the veracity of someof these reductions would question this31 TheCDMrsquos ability to pick the lsquolow-hanging fruitrsquo ofgreenhouse gas emissions is advantageous andprovides incentives for developing countries topartake in the climate change regime32 At the veryleast the CDM has surely raised an awareness ofclimate change issues and policy amongst developingcountries33 Involving developing countries in theclimate change regime now even through a flawedmechanism is better than excluding them altogetherBuilding lsquocapacity and experiencersquo should helpdeveloping countries if they take on bindingcommitments in the future34 Spreading climatechange awareness is still probably better thannothing But spreading awareness and involvingdeveloping countries in a softly-softly approach willbe insufficient to mitigate climate change andpromote sustainable development in the long termProjects have occurred that might bring somesustainable development benefits to developingcountries In the long term sustainable developmentand decarbonisation should be doggedly pursuedBelow it is discussed whether the CDM cancontribute to sustainable development or whetherin fulfilling its awareness raising easy emissionreductions campaign it has already come to the endof its useful life

3SUSTAINABLE DEVELOPMENT INTHE CDM

31 Sustainable Development inthe CDM - an introduction

The type of CDM projects that occur and theircontributions to sustainable development areimportant to the efficacy of the CDM If emissionreductions occur it is still crucial for theenvironmental integrity of the mechanism thatprojects do not damage the environment andcontribute to good environmental practice in thefuture The purpose of the CDM is partly to assistnon-Annex I countries in achieving sustainabledevelopment35 which the Marrakesh Accordsconfirmed36 The CDM has a broad focus lsquoon bothenvironmental and developmental goalsrsquo37 Inensuring emission reductions are met projectsshould not neglect sustainable development Thisis vital so that the trajectories of growth andproduction in developing countries can belsquodecarbonisedrsquo38 The main point aboutdecarbonisation is that prevention is better than thecure Sustainable development represents atremendous opportunity to prevent greenhouse gas


6

31 See Yamin ed note 24 above For papers questioninghow genuine reductions are see Baumert note 15 aboveat 404 Schneider note 26 above at 44 and P Castro andA Michaelowa Empirical Analysis of Performance ofCDM Projects 37 (Zurich Institute of Political ScienceClimate Strategies Report 2008) available atwwwindiaenvironmentportalorginfilesempirical-donepdf

32 R MacWhinney lsquoReducing HFC-23 A CrucialComponent of the Battle Against Global Warmingrsquo 32Evolution Markets 29 October 2007 available at httpn e w e v o m a r k e t s c o m p d f _ d o c u m e n t s H F C -2320Carbon20Creditspdf

33 See Baumert note 15 above at 38934 Id at 383

35 See Kyoto Protocol to the United Nations FrameworkConvention on Climate Change note 1 above Article12(2)

36 Modalities and Procedures for a Clean DevelopmentMechanism as Defined in Article 12 of the KyotoProtocol Decision 17CP7 in Report of the Conferenceof the Parties Seventh Session Marrakesh 29 october-10 November 2001 Vol II Doc No FCCCCP200113Add2 (2002)

37 H Wilkins lsquoWhatrsquos New in the CDMrsquo 112 Review ofEuropean Community and International EnvironmentalLaw 114 158 (2002)

38 C Figueres and K Newcombe Evolution of the CDMToward 2012 and Beyond 2007 available at httpfigueresonlinecompublicationsPost_2012_CDMpdfSee also G Prins et al How to Get Climate Policy Backon Course 10-11 (Oxford Institute for ScienceInnovation and Society University of Oxford 2009)available at httpsciencepolicycoloradoeduadminpublication_filesresource-2731-200917pdf Ondevelopment pathways see Metz ed note 18 above

objectives of the CDM are at best difficult to marrytogether and at worst perhaps even mutuallyexclusive There is a distinction to be made betweenreducing greenhouse gas emissions and addressingclimate change43 and between market mechanismsand sustainable development44 Regarding the latteralthough the CDM has stated it wants to achievethese dual aims succeeding in both has been highlyproblematic In fact a move decisively toward eitheraim could mean the relationship between bothfails45 The market mechanism and emissionreductions part of the CDM is currently beingprioritised to the detriment of sustainabledevelopment This is causing the relationship to failas sustainable development is jettisoned to anunacceptable extent

It might be argued that there is little point inpursuing two different aims Market liberalismrsquosdeference to economics and low prices seems to havelittle to do with the Brundtland Reportrsquos concernabout sustainable development46 The BrundtlandReport speaks of future generations47 but mentionslittle of prices and liberal economic systems Policymakers seem reluctant to question why they areasking the CDM to perform an impossible perhapsschizophrenic task The CDM cannot have its cakeand eat it and increasingly looks like a jack of twotrades but master of neither Sustainabledevelopment and market forces work far fromperfectly together in tandem48 In fact as sustainabledevelopment is a positive externality that is notpriced in to the market the market can fail49 Thisfailure is embodied in choosing the cheapestemissions reductions rather than the most beneficial

emissions occurring in the first place It is thesesustainable development solutions thesepreventative measures which should be taken ratherthan lsquocuringrsquo non-Annex I countries in the futureDevelopment trajectories will become ever morecarbon intensive as time goes on under the businessas usual model If we want to shut the stable dooron climate change before the carbon has boltedsustainable development should be encouraged asmuch as possible The CDM could play animportant role in this

Decarbonisation of the economies of developingcountries is hugely important This will lead to largeemission reductions in the long term Emissionsfrom developing countries are likely to become moreand more important and make up an ever largershare of global emissions as their economies grow39

India and China are likely to be even larger emittersof greenhouse gases in the future40 Thus changingthe development path and reducing the carbonintensity of the economies of non-Annex I parties iscrucial to achieving a low carbon future In the longterm this might well be where the battle againstgreenhouse gas emissions and climate change is wonor lost Populations in developed countries are setto increase far less rapidly or even decline whilstpopulations in the developing world continue toexpand41 Unfortunately in the short term someprojects that contribute significantly to sustainabledevelopment such as smaller projects in the leastdeveloped countries are comparatively financiallyunattractive to investors There might even be alsquotrade-offrsquo between cheap emission reductions andcontributions to sustainable development42

Paradoxically it might be suggested that the twin


7

39 J Hawksworth The World in 2050 Implications ofGlobal Growth for Carbon Emissions and ClimateChange Policy 12 (UK PricewaterhouseCoopers 2006)see Prins and Rayner note 20 above at 11and Driesennote 20 above at 397

40 Id at 1241 lsquoVisualisations OECD vs World Populationrsquo Many Eyes

Website 4 June 2008 available at httpm a n y e y e s a l p h a w o r k s i b m c o m m a n y e y e s visualizationsoecd-vs-world-population

42 M Kenber lsquoThe Clean Development Mechanism ATool for Promoting Long-term Climate Protection andSustainable Developmentrsquo in Yamin ed note 24 aboveat 263 285

43 See Prins and Rayner note 20 above at v44 See Driesen note 19 above at 2145 Id at 6946 Id at 2447 The definition of sustainable development as provided

in the World Commission on Environment andDevelopment report is the development that lsquomeets theneeds of the present without compromising the abilityof future generations to meet their own needsrsquo see WorldCommission on Environment and Development(WCED) Our Common Future (Oxford OxfordUniversity Press 1987)

48 See Driesen note 19 above at 24-2549 This is discussed in more depth in lsquosustainable

development as a positive externalityrsquo below

project in the long term Such choices mean that atechnological benefit is often provided that will lsquoonlyhelp the current generations not futuregenerationsrsquo50

Put another way dressing market mutton assustainable development lamb does the climatechange regime no favours in the CDM context orany other If the CDM is just a market mechanismwith the sustainable development externality notpriced in or achieved to a meaningful extent CDMwould be as well to ditch sustainable developmentaltogether The charade of developing countrygovernments confirming these projects contributeto sustainable development when in reality manyprojects do no such thing is futile No amount ofsustainable development lipstick will change whatthe CDM really is ndash a market mechanism Dressingthe CDM up with soothing but toothless referencesto sustainable development is at best unhelpful andat worst misleading to policy makers who think thatCDM is doing something that it is not It has beenargued that without acknowledging the KyotoProtocolrsquos shortcomings more of the same failingpolicies will be demanded51 The same can be saidfor a misleading CDM Below it is argued thatsustainable development is not adequately reflectedin CDM projects This raises question marks overwhat the CDM wants to achieve and whether itshould be reformed or even abandoned altogether

32 Sustainable Development as aPositive Externality

An important issue to consider is that currentlyunder the CDM only the reduction of greenhousegas emissions is given a monetary value in the formof CERs Conversely contributions to sustainabledevelopment are not monetised Thus the bizarresituation arises where one key objective of the CDMis not given a price even though the CDM lsquohas adual objectiversquo52 This lack of a monetary incentivefor the second key aim of the CDM makes it less

likely that the CDM will achieve both its statedgoals In a market mechanism it is axiomatic thatinvestment money will chase the monetised aim Inthe language of economics sustainable developmentconcerns are mere lsquoexternalitiesrsquo to the monetisedgoal of reduced carbon emissions53 lsquoPositivespilloversrsquo54 of sustainable development are notproperly accounted for in the CDM marketmechanism The CDM fails to properlyacknowledge the positive externality and spilloversof the sustainable development aspects of projectswhich could help non-Annex I countries towards alow carbon future Basic economic theory dictatesthat externalities cause too much or too little of agood to be produced or consumed which might leadto market failure55 In the case of CDM the positiveexternality of sustainable development is notmonetised Thus projects that contribute tosustainable development are undervalued and are notas common as they would be were this externalitypriced into CERs The market fails by not pricingthese externalities and spillovers

There is evidence to suggest that the sustainabledevelopment criterion of CDM projects is not beingtaken seriously In some cases lsquodevelopment benefitsare often more hypothetical than realrsquo56 TheMarrakesh Accords state that the host countryshould decide whether a project contributes tosustainable development57 It is not hard to imaginea government allowing a highly profitable projectissuing many CERs without properly investigatingsustainable development issues that are given nomonetary value The trade-off between the twoCDM aims will fall in favour of the monetised one58


8

50 See Driesen note 19 above at 2451 See Prins and Rayner note 20 above at 752 See Schneider note 26 above at 61 B Pearson lsquoMarket

Failure Why the Clean Development Mechanism WonrsquotPromote Clean Developmentrsquo 15(2) Journal of CleanerProduction 247 (2007)

53 See eg Driesen note 19 above at 65-6654 Id at 45-4955 P Maunder Danny Myers and Nancy Wall Economics

Explained 71 (New York Harper Collins 3rd edn 2000)56 K Brown et al How do CDM Projects Contribute to

Sustainable Development 4 (Norwich Tyndall CentreTechnical Report 16 2004)

57 E Boyd et alThe Clean Development Mechanism AnAssessment of Current Practice and Future Approachesfor Policy 16 (Norwich Tyndall Centre Working PaperNumber 114 2007)

58 YF Huang and T Barker The Clean DevelopmentMechanism and Sustainable Development A Panel DataAnalysis 3 (Norwich Tyndall Centre Working PaperNumber 130 2009)

When governments confirm a projectrsquos contributionto sustainable development if there is no agreedcriterion or definition of what this means it mightbe the case that host countries do not take sustainabledevelopment seriously Studies have suggested thatprojects failed to deliver benefits aside from emissionreductions59 It has also been suggested that therecould be a lsquorace to the bottom in sustainabledevelopment standardsrsquo with these standards beingseverely compromised as governments chaseinvestment60

33 The Problems of DefiningSustainable Development

The overarching problem when discussing whethera project contributes to sustainable development isdefining what lsquosustainable developmentrsquo means Itsmeaning varies from country to country61 Findinga precise definition is problematic Should nuclearenergy for example be deemed sustainable Itresults in less greenhouse gas emissions thanconsuming fossil fuels even though problems ofwhat to do with nuclear waste have not yet beensatisfactorily solved The Marrakesh Accordsanswer in the negative62 However it is not beyond


the realms of fantasy to argue that nuclear energycould contribute to some definition of sustainabledevelopment if we only define sustainabledevelopment as reducing carbon emissions Ifpossible more explicit statements should be madeunder the CDM in order to clarify what does anddoes not come under the umbrella of sustainabledevelopment Problems in defining sustainabledevelopment should not necessarily preclude CDMprojects from attempting to boost generalsustainability aims It has been suggested that asolution to this problem lsquowould be the adoption ofstrong clearly enunciated criteria for sustainabledevelopment whether at the national orinternational levelsrsquo63 Below it will be argued thelikelihood of such an agreement is extremely slim64

In spite of the difficulty of defining sustainabledevelopment it is worth trying to form somecommon strands of thought The BrundtlandCommissionrsquos aforementioned definition65 is auseful if imperfect start The UNDPrsquos HumanDevelopment Index might also show some indicatorsthat would point to a CDM project more focused onsustainable development66 Sustainable developmentseems to have a focus on the future It solves not justshort term issues but attempts to build capacity andknowledge that will allow countries to develop inthe long term too The word lsquosustainablersquo in thiscontext seems synonymous with lsquolong-term benefitsrsquoas opposed to short term CDM projects purelyfocused on CER profits Long term benefits mightinclude long-term employment prospects improvedsocial welfare67 permanent transfer of superiortechnology and improved infrastructure facilitatingdevelopment after the project is finished Capacitybuilding is also hugely important

The crucial point is leaving a legacy in the hostcountry so that benefits continue after the projectends When this paper discusses sustainabledevelopment it is really referring to long term

9

59 See Brown et al note 56 above at 4 Boyd et al note 57above at 20 International Institute for SustainableDevelopment Clean Development Mechanism Realisingthe Development Dividend 2007 available at httpwwwiisdorgclimateglobalcdmaspfive KH OlsenThe Clean Development Mechanismrsquos Contribution toSustainable Development A Review of the Literature(No exact date) available at httpwwwcd4cdmorgPublicationsCDMampSustainDevelop_literaturepdfSchneider note 26 above at 47 C Sutter and JCParrenolsquoDoes the Current Clean Development Mechanism(CDM) Deliver its Sustainable Development Claim AnAnalysis of Officially Registered Projectsrsquo 841 ClimacticChange 75-90 (2007) and A Michaelowa andKMichaelowa Climate or Development Is ODADiverted From Its Original Purpose 1 (HamburgHamburg Institute of International Economics HWWIResearch Paper 2 2005)

60 A Cosbey et al Realizing the Development DividendMaking the CDM Work for Developing Countries 43(Manitoba International Institute for SustainableDevelopment 2005)

61 See Huang and Barker note 58 above at 462 See Modalities and Procedures for a Clean Development

Mechanism as Defined in Article 12 of the KyotoProtocol note 36 above at 20

63 See Cosbey et al note 60 above at 4364 As discussed in the lsquoimproving the development dividendrsquo

section65 See Driesen note 19 above66 SHuq Applying Sustainable Development Criteria to

CDM Projects PCF Experience 8 (Washington DCPrototype Carbon Fund World Bank PCF Report 10 2002)

67 See Boyd et al note 57 above at 33

environmentally sound solutions to developmentthat build capacity technology and social welfarein developing countries and particularly in leastdeveloped countries This might be an imperfectattempt at defining an essentially contested conceptHowever it is important to lay down some criteriaso that it is possible to discuss sustainabledevelopment in the climate change context Thecreation of benchmarks such as lsquoThe GoldStandardrsquo68 which aims to lsquoprovide assurance thatCDM projects will deliver real emissions reductionsand a clear contribution to sustainabledevelopmentrsquo69 seems to suggest that laying downsome criteria that can be agreed on is indeed possibleIt is worth noting that the Gold Standard criteriahave significant drawbacks such as problems withlabelling sustainable development70 its voluntarynature71 its small share of the overall market72 andit targeting lsquostand-alonersquo projects when manyprojects seek to change existing industrialprocesses73 There is no reason to think another setof rules attempting to define sustainabledevelopment would not encounter similar problems

Some types of projects such as renewable energyor energy efficiency projects as well as those withdemonstrable long-term benefits for the hostdeveloping country74 are more likely to contribute

to sustainable development Thus arguably theseprojects should be given the honorific status ofcontributing to sustainable development Howeverforming a concrete definition of what sustainabledevelopment entails involves extremely complex andpolitically difficult value judgements If the CDM isto exist in the future with its sustainable developmentaim intact tough political decisions will have to betaken Below it is argued creating concrete definitionson sustainable development is a hugely difficultexercise probably precluding the CDM frommeaningfully contributing to sustainabledevelopment This brings into question the veryexistence of the CDM certainly in terms of itsperhaps fictitious contribution to sustainabledevelopment Below is an example of the type of projectthat has led to accusations that the CDM neglectssustainable development This is followed by asection that suggests the all important lsquodevelopmentdividendrsquo75 is highly unlikely to ever be paid

4EXAMPLES OF CDM PROJECTS

41 HFC-23 Destruction and lsquoEndof Pipersquo Projects

The future legacy of a project and its contribution tosustainable development are crucial Regrettablysome CDM projects are more concerned with gettingCERs issued and then getting out of the countryrather than committing to long term sustainabledevelopment This can be seen with the largenumbers of lsquoend of pipersquo projects Projects such asHFC-23 incineration involve windfall CER profitsfor investors without necessarily helping the longterm development of the host country These typesof projects have been harshly criticised for not helpingthe CDM achieve its aim of sustainable development76


10

68 See generally The Gold Standard Foundation The GoldStandard Manual for CDM Project Developers (GenevaThe Gold Standard Foundation 2006)

69 See Kenber note 42 above at 272-27370 A Muller lsquoRisk Management in the Clean Development

Mechanism (CDM) ndash The Potential of SustainabilityLabelsrsquo in B Hansjuumlrgens and R Antes eds Economicsand Management of Climate Change Risks MitigationAdaptation 193 203 204 (New York Springer 2008)

71 See Muller lsquoHow to Make the Clean DevelopmentMechanism Sustainable ndash The Potential for RentExtractionrsquo 356 Energy Policy 3203- 3205 (2007)

72 A Michaelowa CDM Current Status and Possibilitiesfor Reform 14 (Hamburg Hamburg Institute ofInternational Economics (HWWI) HWWI ResearchPaper Number 3 2005)and C Hepburn Response toDefra Consultation on Voluntary Carbon Offsets 13April 2007 available at httpwwwjpmorganclimatecarecommediadocumentspdfhepburn_2007_response_to_defra_offset_consultationpdf

73 S FootlsquoAn Evaluation of the Present CleanDevelopment Mechanismrsquo 163 Environmental Law ampManagement 125-134 127 (2004)

74 See Boyd et al note 57 above at 33-34

75 This phrase is taken from Cosbey et al note 60 above76 See eg No More Perverse Incentives and Windfall Profits

for HCFC-22 Production Under CDM Press Release 6December 2008 available at httpwwwnoe21orgdocsPress20release20Noe2120HFC2320methodologyhtmand Schwank note 25 above

HFC PFC and N20 projects only account for 21per cent of total CDM projects but represent adisproportionately high 25 per cent of the CERs by201277 This indicates the huge CER potential ofthis criticised form of CDM project Clearly thesetypes of projects are an important part of the CDMand should be properly examined

HFC-23 projects were described as lsquoone of the mostcontroversial issuesrsquo of the CDM78 In September2007 the parties under the Montreal Protocol agreedto speed up the process of phasing out the productionof ozone depleting substances in all countriesHCFC-22 and its by-product HFC-23 are suchsubstances HCFC-22 is a substitute for the CFCsthat damage the ozone layer although HCFC-22 andin particular its unwanted by-product are hardlyenvironmentally friendly HFC-23 is a greenhousegas with a global warming potential of 11700 Dueto its massive global warming potential thedestruction of this substance can lead to a hugeamount of CERs being issued as indicated above bythe large share of CER issuance These projects havebeen criticised as allowing HFC-23 destruction to beeligible for CERs at a cost of lsquonearly $6 billionrsquo79 Itwas suggested that it would be far cheaper at just $100million to pay HCFC-22 producers to destroy HFC-23 rather than giving them an estimated $6 billion inCER credits to perform exactly the same function80

These projects have been derided for giving a windfallto a few industrial sites and as a lsquomoney machinersquo81

that offers little in the way of sustainable developmentand long term benefits to the host country82

It has also been argued that CER sales around theHFC-23 destruction process would actually allowHCFC-22 producers to increase production as theCER sales make continued production profitable83

This argument that these projects could provideperverse incentives to continue to produce HCFC-22 is a big problem and clearly contrary to emissionreductions and sustainable development aims Theproduction of such HFCs damages the environmentHowever it was feared that HCFC-22 productioncould actually be boosted by the CDM as CERswould give a financial incentive to build newfacilities that produce HFCs Clearly such an effectwould be highly detrimental to the climate changeregime and therefore must be avoided

Issuing large amounts of CERs for HFC-23 projectstakes away finance from more environmentallyfriendly technologies to the long-term detriment ofthe climate change regime84 One approach to theHFC problem is to exclude such projects from beinggiven CERs in the future85 This is fair as HFC-23destruction neglects the sustainable development aimof the mechanism Far from ensuring developingcountries pursue a sustainable development pathviable in the long term this type of CDM projectwith its perverse incentives could have the disastrouseffect of embedding bad practice in developingcountries This can be contrasted with the view thatHFC-23 destruction remains a kind of low lying fruitthat the CDM should pick as this will reducegreenhouse gas emissions and encourage earlyaction86 On balance it seems that the possibility ofperverse incentives negates any emission benefitsthat might occur Happily the problems with HFC-23 projects have been acknowledged New facilitiesproducing HCFC-22 are ineligible for considerationas a CDM project Worries have been expressed thatnow this loophole is closed others will be foundand exploited87 The problems regarding HFC-23destruction indicate the issues that CDM projectshave in terms of sustainable developmentcontributions


11

77 lsquoNumber (percentage) of CDM projects in each categoryof typesrsquo UNEP Risoe Centre Website 1 October 2009 availableat httpcdmpipelineorgcdm-projects-typehtm2

78 Carbon Finance The Credit for Destruction 15 February2007 available at httpwwwcarbon-financeonlinecomindexcfmsection=featuresampaction=viewampid=10420

79 See lsquoKyoto Protocol lsquoloopholersquo Has Cost $6billionrsquo note10 above

80 Id81 See Prins and Rayner note 20 above at 3182 See Carbon Finance note 78 above83 See Schwank note 25 above at 4

84 See Carbon Finance note78 above85 See Schneider note 26 above at 6286 R MacWhinney lsquoReducing HFC-23 A Crucial

Component of the Battle Against Global Warmingrsquo 32Evolution Markets 1 29 October 2007 available at httpnewevomarket s compdf_documentsHFC-2320Carbon20Creditspdf

87 See Prins and Rayner note 20 above at 31

lsquoessentially infinitersquo supply of energy relatively lowand falling operating costs and a hedge against therising prices of fossil fuels92 Renewable energyprojects have been created under the CDM In termsof total number of projects renewables come up ontop at around 60 per cent of total projects93 Whilstthis sounds positive the CERs generated are alsorelevant In terms of CERs issued renewables andHFC and N20 destruction are on a similar level andpreviously the latter generated far more CERs94

HFC projects account for the majority of CDMpayments for the period up to 201295 This issignificant as large climatically irrelevant projectsgenerating cheap credits in huge blocks take awayCERs from renewable energy projects In terms ofnumbers of projects renewable energy looks wellplaced in the CDM In terms of the number of CERsit seems there is more work to do for sustainabledevelopment to be better promoted Morerenewable energy projects and the issuance of moreCERs in relation to renewable energy projectsshould lead to developing countries having lesscarbon intensive economies in the future This isnot the case for HFC projects whose CER richesdeprive more worthy projects of finance

The success and high percentage (but not necessarilyhigh CER numbers) of renewable energy projectscan be contrasted with small-scale community-basedprojects These projects offer comparatively highsustainable development advantages but get littleattention from investors because smaller amountsof CERs are issued Smaller projects seemincreasingly commercially unviable with low carbonprices96 Their low mitigation potential because oftheir necessarily small scale might be a constrainingfactor97 However these projects should bepromoted more widely because of their sustainable

42 Renewable Energy SmallScale Community and EnergyEfficiency Projects

Three sectors have been identified asunderperforming in the CDM making it harder forthe CDM to achieve its sustainable developmentobjectives Were there more of these kinds ofprojects the CDM could more genuinely contributeto sustainable development Those underperformingsectors are the renewable energy sector small scalecommunity projects and industrial energyefficiency88 Compared to projects such as HFC-23destruction these sectors seem to have realsustainable development benefits In spite of theproblems in defining sustainable development it isfair to say that the above sectors are more likely tohave long term benefits for the host country thanend of pipe projects Sustainable developmentbenefits might include economic social orenvironmental benefits with each category also ableto have sub-criteria89 An incomplete list of thesecriteria might include advantages such asemployment improving cost effectiveness ortechnology training improving health povertyreduction good governance greenhouse gasemission reductions less pollution protecting biodiversity and many more90 Although there is nota precise definition of sustainable development thereseems to be some consensus on the types of criteriathat might be used to form a more exact definitionUsing these criteria we can see that the CDM is notpromoting sustainable development as it should be

Of the three sectors mentioned renewable energy isseen as a sensible long term way to retreat from acarbon intensive economy CDM should be usedto encourage this transformation as it is in the longterm interests of the environment These renewableprojects provide significant sustainable developmentbenefits91 Advantages of such projects include an


12

88 See Cosbey et al note 60 above at 2389 Id at 14-1590 This incomplete list of sustainable development criteria

is taken from Cosbey et al note 60 above at 15 Othergood sources for judging sustainable development inCDM projects include Huq note 66 above at 12 and TheWorld Wide Fund for Nature note 68 above at 20-22

91 See Cosbey et al note 60 above at 23

92 Umwelt Bundesamt Renewable Energy and the CleanDevelopment Mechanism Potential Barriers and WaysForward A Guide for Policy Makers 3 (Berlin FederalMinistry for the Environment Nature Conservation andNuclear Safety 2007)

93 See UNEP Risoe Centre note 30 above94 UNEP Risoe Centre Growth of Total Expected

Accumulated 2012 CERs 1st October 2009 available athttpcdmpipelineorgcershtm1

95 See Prins and Rayner note 20 above at 3096 See Cosbey et al note 60 above at 2397 Id

development benefits and the scope for replicatingsuch projects and imbedding environmentally goodpractice in developing countries in the long term98

Indeed there are regulations to this effect Small scaleprojects enjoy simplified modalities and proceduresso that the complications and costs of the CDMproject cycle do not completely deter smallerprojects99 In spite of this larger projects make upthe majority of CDM projects100 Arguably thesesimplified modalities and procedures have beeninsufficient in encouraging smaller CDM projectsMore needs to be done to encourage small scaleprojects that are highly beneficial to sustainabledevelopment The energy efficiency sector is alsopraised but somewhat underdeveloped under theCDM The prospects of such energy efficiencyprojects seem good in terms of long termenvironmental and economic benefits101 Policiesto stimulate more projects in these key sectors arediscussed in the lsquoimproving the developmentdividendrsquo section

43 The Location of CDM Projects

The concentration of CDM projects in just a fewcountries is an issue that should be addressed Awide geographical spread of projects would allowthe CDM to contribute to sustainable developmentmore equally and effectively Addressing thisproblem could boost even a vaguely defined notionof sustainable development Generally smallcommunity based projects especially those in leastdeveloped countries offer the greatest sustainabledevelopment potential102 whilst unfortunatelyoften offering fewer emission reductionopportunities The worrying trend of the clusteringof CDM projects in a few developing countries is

not in line with what parties to the Kyoto Protocolintended The need lsquoto promote equitablegeographic distribution of CDM projectsrsquo has beenstressed103

The vast majority of CDM projects are located in afew large developing countries Brazil India andChina account for over 75 per cent of expectedannual CERs104 Whilst these big developingcountries dominate the market for hosting CDMprojects the least developed countries wherecapacity building is required most could get leftbehind The aims of sustainable development andits benefits should not be concentrated on just a fewstates Steps should be taken to improve thegeographical distribution of CDM projects perhapsincluding targets incentives or quotas105 in orderto spread the benefits of CDM around the developingworld As with increasing CER issuance for projectswith better long-term development advantages apolicy of increasing the number of CERs issuedwhen projects occur in those least developedcountries could be pursued106 The CDM is amarket orientated mechanism thus it seemsappropriate and justifiable to intervene in thatmarket when it fails If anything in the recentcontext of financial turmoil intervening in themarket to achieve better more equitable sustainableresults is easier to justify than it has ever been inthe lifespan of the Kyoto Protocol Taming the beastof the market has never been more necessary If weacknowledge that in some respects the CER marketis not working it should be possible to intervene inthat market This would not involve taking awayCERs that had already been issued or projects thathad already begun However for future registrationof CDM projects it might be a policy worthconsidering This might improve the market andbetter serve the sustainable development aim of theCDM


13

98 Id99 See Yamin note 14 above at 179 see also Simplified

Modalities and Procedures for Small-scale CDM ProjectActivities Annex II Decision 21CP8 in Report ofthe Conference of the Parties to UNGCCC EighthSession New delhi 23 october-1 November 2002 DocNo FCCCCP20027Add3 (2003)

100 The figure is 5446 per cent see UNFCC RegisteredProjects Activities by Scale 30 October 2009 availableat httpcdmunfcccintStatisticsRegistrationRegisteredProjByScalePieCharthtml

101 See Cosbey et al note 60 above at 23102 See Huq note 66 above at 22

103 See Modalities and Procedures for a Clean DevelopmentMechanism as Defined in Article 12 of the KyotoProtocol note 36 above at 20

104 UNFCC Expected Average Annual CERs by HostParty 30 October 2009 available at httpc d m u n f c c c i n t S t a t i s t i c s R e g i s t r a t i o n AmountOfReductRegisteredProjPieCharthtml

105 See Boyd et al note 57 above at 33106 Id

From a purely financial market-based perspectivetrying to initiate projects where costs are high dueto a poor investment environment or other reasonswould be problematic because the CDM is tryingto achieve emission reductions at the lowest possiblecost This means that the CDM naturally as amarket mechanism ruthlessly picks the lsquolow lyingfruitrsquo of cheap greenhouse gas emission reductionssuch as HFC-23 destruction in countries that alreadyhave a good investment environment It bypassesother projects that have more expensive emissionreductions but more sustainable developmentbenefits107 Picking low lying fruit is not necessarilya bad thing108 but it achieves little in terms of longterm sustainable development It is no coincidencethat countries hosting the most CDM projects alsoenjoy the most Foreign Direct Investment (FDI)This is largely due to reasons such as betterinfrastructure access to markets and stability in themacroeconomic and political sphere109 Forexample China is a big winner in terms of CERissuance with expected annual CERs 5889 per centof all those issued110 and is also one of the biggestreceivers of FDI This can be contrasted with Africawhich receives comparatively little FDI orinvestment through the CDM111 A relatively stableand attractive investment environment will attractFDI as well as CDM projects It could be arguedthat as a market mechanism has been created theresults and judgements of the market in concentratingprojects in a relatively small number of developingcountries should be accepted This would be to thelong term detriment of sustainable development

The Marrakesh Accords seemed to foresee thisproblem It was decided that Annex I countriesshould assist lsquoin particular the least developed andsmall island developing stateshellip with buildingcapacity in order to facilitate their participation inthe CDMrsquo112 However Annex I parties have still

not done enough to build capacities in the leastdeveloped countries Consequently CDM projectsare concentrated in bigger more developedcountries That CDM projects in least developedcountries are exempt from the share of proceeds toassist with the cost of adaptation is a welcomestep113 but that two per cent difference is arguablyinsufficient to conclusively swing investors towardsbacking CDM projects in riskier less investment-friendly countries These risks in the least developedcountries are problematic for investors Whilst beingunable to eradicate those risks within the climateregime it might be possible to compensate for thoserisks Compensation could be in the form of creatingincentives for projects in countries that ordinarilyspook investors in to taking their money elsewhereIt is not just about removing the risks It is alsoabout speaking just about the only language investorsknow by giving them monetary compensation - acarrot to capitalists who would otherwise not investThe CDM is a market mechanism and markets reactto incentives114 Examples of incentives couldinclude a least developed country subsidyConceptually this can be justified by the existingpolicy of exempting CDM projects in least developedcountries from adaptation fund contributions Thismeans the international community has alreadyrecognised that the inequitable geographical spreadof CDM projects is problematic By creatingincentives for CDM projects in the least developedcountries the CDM could play an important rolein many countries not just a select few This shouldhopefully make for more even equitable andsustainable development This would ultimatelyhelp the transition to a low carbon future so crucialfor the climate change regime to succeed

Addressing this inequitable geographical distributionof CDM projects is much more easily said than doneIn terms of introducing a least developed countrysubsidy it is difficult to think of where exactly thisextra money would come from in the internationalcommunity Such funding is difficult to acquire at


14

107 See Cosbey et al note 60 above at 46108 See Driesen note 20 above at 409109 A Cosbey Foreign Investment Making it Work for

Sustainable Development19-23 ( Manitoba InternationalInstitute for Sustainable Development 2002)

110 See UNFCC note 104 above111 See Cosbey note 109 above at 19112 See Modalities and Procedures for a Clean Development


113 This decision was also part of the Marrakesh AccordsId at 23

114 C Carr and F Rosembuj lsquoFlexible Mechanisms forClimate Change Compliance Emission Offset Purchasesunder the Clean Development Mechanismrsquo 16 New YorkUniversity Environmental Law Journal 44 61 (2008)

the best of times never mind in the midst of thegreatest financial crisis since the Great DepressionWith governments worldwide either bailing outbanks or instigating huge fiscal stimuli it is hard tosee from where these subsidies would come Even ifsuch funds could be found intervening in the marketto such an extent would be politically difficult if notimpossible The CDM remains a market mechanismIt remains the case that sustainable development andmarket liberalism maintain an uneasy relationshipand a move too firmly towards sustainabledevelopment115 in the form of subsidies couldadversely affect the market liberalism upon whichthe CDM is based Securing international agreementon such subsidies would also be hugely problematicBelow it is argued such a scheme like others aimedat improving the development dividend is unlikelyto ever to come to fruition

5IMPROVING THE lsquoDEVELOPMENTDIVIDENDrsquo116 OF THE CDM

It has been suggested that the CDM be reformed sothat it can better meet its objective of contributingto sustainable development Defining whatsustainable development means is crucial if this goalof the CDM is to be achieved A set of criteria agreedinternationally could help guide if not define thenotion of sustainable development more preciselyIt would be much easier to realise sustainabledevelopment within the CDM if this phrase wasgiven some internationally agreed guidingprinciples117 It might be more realistic to expectguiding principles that countries use on a case-by-case basis rather than an agreement on a strictdefinition but an elaboration on principles andguidelines would still be a worthwhile exercise118

This would be a difficult task as internationaldiplomacy is fraught with bargaining and wrangling


15

The task of defining sustainable development acrossmore than a hundred radically different developingcountries would be nigh on impossible There areserious issues regarding the sovereignty of developingcountries Countries do not want to be dictated toas to what sustainable development should mean forthem119 These countries each have their owngovernments who best know what sustainabledevelopment should mean in their particularnational circumstances Using an internationalabstract set of possibly alien criteria in all developingcountries would be unwise It remains unlikely thatdecisions regarding sustainable development couldbe made Developing countries are likely to resist aone-size-fits-all definition for sustainabledevelopment Priorities vary hugely both withindeveloping countries but also between them120

Changing and differing priorities make it moredifficult to decide on a fixed definition of sustainabledevelopment Universalism insisting on agreementfrom all governments leads to lsquothe lowest ofcommon denominatorsrsquo121 Getting well over 100countries from landlocked Tajikistan to island stateTuvalu to agree on what sustainable developmentmeans would probably be the diplomatic equivalentof sprinting towards a brick wall If the CDM is tohave a future and sustainable development is tocontinue to be a main aim of the mechanism thenit is surely the case that more guidance on what thiskey aim means is required Unfortunately it seemsthat no meaningful international agreement on thedefinition of sustainable development will beforthcoming This brings into question the veryexistence of the CDM or at the very least itsincreasingly tenuous commitment to sustainabledevelopment

As previously identified sustainable developmentbenefits are not given a monetary value under theCDM Some solutions have been offered toameliorate this situation For example projectswhich have limited or no benefits for sustainabledevelopment could have the number of CERs issuedreduced whilst CERs given to projects contributingto sustainable development would stay the same122

115 See Driesen note 19 above at 2169116 This phrase is taken from Cosbey et al note 60 above117 See Cosbey et al note 60 above at 44118 Id

119 See Kenber note 42 above at 265120 See Cosbey et al note 60 above at 22121 See Prins and Rayner note 20 above at 27122 See Schneider note 26 above at 61

This would mean that projects that significantlycontribute to sustainable development would havea higher market value123 In theory overall therewould be a smaller supply of CERs leading to afuture contraction in supply pushing prices up Thismight make projects contributing to sustainabledevelopment more attractive In practice this israther simplistic There seem to be at least fourreasons why such a scheme is unlikely to workFirstly it is unclear as to what degree CERs shouldbe reduced Secondly there seems to be littleevidence that a higher range of revised prices wouldboost sustainable development in the CDMThirdly agreeing the degree of reduction in CERswould be a hugely difficult diplomatic taskFourthly and perhaps most problematically partieswould have to agree on what exactly makes oneproject more conducive to sustainable developmentthan another124 This paper has already suggestedthis latter point is an extraordinarily difficult hoopto jump through for the CDM to properlycontribute to sustainable development

A quota system is another policy to ensure thatsustainable development in the CDM is properlyprioritised or at least put on an equal footing withthe aim of reducing greenhouse gas emissions Underthis policy developed countries would commit to aminimum quota of projects that greatly benefitsustainable development with a certain percentageof the CERs in a countryrsquos portfolio coming fromsuch projects125 The natural complement to thispolicy would be to provide disincentives to projectsthat issue a high amount of CERs but have fewsustainable development benefits126 In what isdescribed as lsquoan intentional distortion of the marketto favour high-benefit projectsrsquo certain lsquosustainablersquotypes of projects could gain twice or three times asmany CERs whilst projects failing to createsustainable development advantages would haveCERs cut by a third or half127 This would representa radical distortion of the market Such a distortionwould no doubt be anathema to CDM investors who

require certainty in order to make investmentdecisions This policy is probably too large adeparture from established practice The problemsidentified in the last paragraph including difficultyin reaching an international agreement and definingsustainable development apply here too In theoryit might be a policy governments could considerIn practice many governments seem more concernedwith CER issuance than long term developmentbenefits Following this through to its logicalconclusion the development dividend is likely toforever be in arrears in the CDM There seems tobe no policy that can be realistically pursued torectify this The shareholders of a company wouldnot put up with such a brazen debt ad infinitumSimilarly the countries that created the CDM ndash ineffect the shareholders ndash cannot forever stand by andwatch its creation fail to deliver its sustainabledevelopment dividend again and again withoutconsequences The CDMrsquos failure with regards tosustainable development rightly brings into questionits very existence

Sustainable development seems impossible to defineinternationally amongst many countries Thisprecludes the option of actions such as marketdistortion and CER reduction that could help betterreflect sustainable development in the CDMSustainable development has passed the CDM byThere is little prospect of reforming it to achievethis second aim The CDM is primarily a marketmechanism that picks low lying fruit with littledeference to sustainable development Reformingthis global market mechanism would requireagreements and definitions that diplomatically andpolitically are highly unlikely to ever be agreedCDM reform without a sustainable developmentdefinition is impossible as a vital piece of the puzzleis missing This piece is not likely to be found sothe better view would be to end the charade thatthe CDM is somehow contributing to sustainabledevelopment The CDM should be earmarked as apure market mechanism that might reduceemissions but does not contribute to sustainabledevelopment

Continuing the CDM-sustainable developmentcharade is a recipe for erroneous policy makingPolicies should be made and negotiations undertakenwith reference to all the correct facts and


123 Id124 Id125 Id126 See Boyd et al note 57 above at 34127 Id

16

information as far as possible128 Policy makersmight be seduced into thinking the CDMcontributes to sustainable development especiallywhen both the Kyoto Protocol and CDM hostcountries state this During future climate changenegotiations policy makers might see that the CDMalready contributes to sustainable development andthus decide that no new mechanism or policy isrequired in this area This is patently false In theway that the Kyoto Protocol gave lsquoan illusion ofeffective actionrsquo and assuaged political concern129

the CDM gives an illusion of contributing tosustainable development We have learned abovethat the reality is that the CDM contributes little tosustainable development The developmentdividend is not paid The parties should explicitlysay this so the schizophrenic mechanism can be freedfrom its hitherto impossible task of being two thingsat once It can then contribute to the climate changeregime by doing what it can do best namely being amarket mechanism that picks low lying fruit andreduces emissions If there is no low lying fruit leftperhaps it should be abandoned altogether Climatechange mitigation and sustainable developmentshould be pursued elsewhere through differentmechanisms or policies

6THE ECONOMIC CRISIS AND ITSEFFECTS ON THE CDM

It would be remiss to conduct this analysis of CDMwithout a mention of the current financial crisiswhich is having an effect on many areas of societyglobally The climate change regime does notoperate in a political and economic vacuum and theeffect of lsquothe greatest challenge to the world

economy in modern timesrsquo130 on the CDM and inparticular on the carbon price should be assessed

Climate change policy and CDM projects are notimmune from the turmoil that the financial crisis iscausing for the budgets of governments and theeconomy in general One issue that has badly affectedCDMs has been the collapse of the prices of CERsThe CER price fell to a low of about 7 in Februaryalthough has since gained some ground to trade above12 This is 58 per cent up on its record February

low131 and is indicative of the massive volatilitysweeping through the market at present It wascommented in February that at those low priceslsquomany new emissions reduction projects under theCDM are not viablersquo132 Indeed just comparing thedifference in sentiment between February and Marchshows the unpredictability and volatility in themarket The volatility is not a new phenomenon asthe carbon market also crashed in 2006133

This is problematic for investors as one of the mostimportant factors when making an investmentdecision is certainty The carbon markets have beendescribed as having lsquomanic and fantastical qualitiesreminiscent of the South Sea Bubble of the 1920srsquo134

With prices being so volatile it makes CERs a lessattractive investment because investors are lesscertain as to what prices will be in the future Thisalso affects projects not locked in to previouslyhigher prices Lack of investor certainty willprobably have a detrimental effect on the overallvolume of CDM projects That lack of certainty iscombined with low prices of CERs which haverallied but are still well below last yearrsquos levels135


128 In terms of knowing all the correct information it isimpossible to know if we are aware of all the issues andfacts as climate change is a lsquowickedrsquo problem See Prinsand Rayner note 20 above at 27 It does however seemprudent not to negotiate on the basis of falseinformation in this case that the CDM is doing what itsays and contributing to sustainable development

129 See Prins and Rayner note 20 above at v

130 Global Plan for Recovery and Reform LeadersrsquoStatement from the G20 Summit in London 2 April2009 available at httpwwwlondonsummitgovukresourcesennews15766232communique-020409

131 Carbon Positive EUA Recovery Extends to Fifth Week 18March 2009 available at httpwwwcarbonpositivenetviewarticleaspxarticleID=1456

132 Carbon Positive CER Market Struggles UnderDepressed Prices 23 February 2009 available at httpw w w c a r b o n p o s i t i v e n e t viewarticleaspxarticleID=1369

133 See Prins and Rayner note 20 above at 20134 Id at 9135 Carbon Positive EUA Prices Claw Back Lost Ground 4

March 2009 available at httpwwwcarbonpositivenetviewarticleaspxarticleID=1432

17

Making rational investment decisions in such aninherently volatile market is extraordinarilydifficult This is hugely problematic for a marketmechanism seeking investment

Low carbon prices are also likely to make CDMprojects less attractive to investors as emissionreductions per ton will be less profitable The lowprice of CERs could force developers to lsquocut cornerson additionality and sustainable development aspectsof projectsrsquo136 A low carbon price makes non-additional projects that do not contribute tosustainable development more likely137 Lowcarbon prices and volatility in the market at leastpartly caused by the current financial crisis are likelyto have a detrimental effect on the fewer CDMprojects that do occur Those CDM projects thatstill take place might well be of inferior quality interms of sustainable development

A further issue related to the economic crisis is thatthe economies of some Annex I countries haveshrunk The total GDP of the G7 countries wasforecast to contract by four per cent in 2009138 butsome industrialised economies have since returnedto growth albeit extremely modest growth139

Previously plummeting GDPs and subsequentanaemic growth are likely to have an effect oncarbon emissions which in the face of reducedeconomic activity will probably be reduced tooThis reduction in output has led to the unintendedresult of reduced emissions140 Fewer carbonemissions are of course good news for the climateEventually however this might cause demand for

CERs to fall as the emissions of industrialisedcountries are reduced through the recessionrendering it unnecessary to purchase as many CERsas emissions fall with GDP This could have animpact on the carbon markets in the future and couldfurther depress the carbon price This in turn mighthave a detrimental effect on the number and qualityof CDM projects

If there are fewer CDM projects and those CDMprojects that run are less profitable this will have adetrimental effect on the already poor state of thefinances of the adaptation fund This fund allowsthe proceeds of the CDM to be used to helpdeveloping countries vulnerable to climate changeto fund adaptation requirements It also coversadministrative expenses although there is no prioritybetween these two aims141 To compensate for thiscollapse in revenues for the fund it could be arguedthat the figure of two per cent of CDM profits thatthe fund currently receives should be raised Using2007 figures one study estimated that the adaptationfund would raise in the region of $180 millionassuming a CER price of $1145142 These 2007figures may have to be revised down in light ofworsening economic sentiment This arguablyoptimistic figure of $180 million contrastsunfavourably with the cost of adaptation mentionedin the Stern Report which listed the cost ofadaptation as one per cent of global GDP143 Clearlyunder such requirements $180 million is a paltryamount Of course adaptation measures will notjust come from this CDM fund and the figure in theStern Report is a global one rather than just focusingon developing countries However it is clear thatthe adaptation fund is not close to providingdeveloping countries with adequate funds Thisshows that more funds should be provided TheCDM and the adaptation fund are actually just asmall piece in the climate change jigsaw and thepossibilities for its useful reform and very existenceneed to be evaluated in this light


136 See Kenber note 42 above at 282137 Id138 HM Treasury (UK Government) Budget 2009

Building Britainrsquos Future April 2009 at 184139 For precise growth statistics see BBC lsquoFrance and

Germany exit recessionrsquo BBC News 13 August 2009available at httpnewsbbccouk1hi8198766stmBBC lsquoJapanrsquos Economy Leaves Recessionrsquo BBC News17 August 2009 available at httpnewsbbccouk1hi8204075stm BBC lsquoUS Economy is Growing OnceAgainrsquo BBC News 29 October 2009 available at httpnewsbbccouk1hibusiness8331497stm and BBClsquoUK economy emerges from recessionrsquo BBC News 27January 2010 available at httpnewsbbccouk1hibusiness8479639stm

140 See Prins et al note 38 above at 3

141 See Kyoto Protocol to the United Nations FrameworkConvention on Climate Change note 1 above Article12(8) and Yamin note 14 above at 186

142 See Boyd et al note 57 above at 14143 N Stern Stern Review The Economics of Climate

Change HM Treasury and Office of Climate ChangeOctober 2006 page vi

18

With lower amounts of investment and perhapslower CER prices in the coming months and yearsbecause of the economic crisis it could be arguedthat it would be worth increasing the amount ofCER money that gets paid in to the adaptation fundHowever this could have the perverse effect ofmaking CDM projects even less profitable in analready harsh economic climate therebydiscouraging investment in CDM projects and CERsIt would make little sense for example to increasethe figure set aside for the adaptation fund to fourper cent if this resulted in half as many CDMprojects taking place because of a squeeze on profitsThe already paltry sums in the adaptation fundwould probably not be greatly added to by such apolicy In the current climate investors need all theencouragement they can get to invest in CERs ratherthan lowering their already reduced profits byincreasing adaptation fund contributions Howevermaking funds available for the adaptation fund orother funds aimed at mitigating climate change andcontributing to sustainable development will behugely difficult with government budgets alreadymassively stretched The current financial crisis islikely to have an adverse effect on both CDMprojects and the values of CERs generally This is afurther handicap for an already imperfect CDMregime

It should be noted that pessimism regarding theeconomy has diminished in recent months withstock markets around the world rallying144 CERprices have continued to increase in the second halfof 2009 although the market might be due for acorrection over the next few months145 Howeverthis merely reflects the fact that the economicsituation has gone from bad to less bad Given someof the apocalyptic predictions during the darkestwinter days of 2008 an improvement from thatsituation is not good just less bad Gordon Brownrsquos

Freudian slip that he lsquosaved the worldrsquo146 is perhapsindicative of the apocalypse aversion goal at the timewhich is of course a remarkably low base fromwhich to judge onersquos progress The economicrecovery will take some time continuing to havean effect on climate policy In particular lowercarbon prices despite the recent rise seem set tostay and the return of well over 20 carbon as in2008147 is some way off

7CONCLUSION

It is highly unlikely that the CDM cansimultaneously contribute to sustainabledevelopment and reduce greenhouse gas emissionsas it is essentially a market mechanism This paperhas identified problems with the CDM and alludedto some of its moderate successes For example itsability to pick the low lying fruit of easy emissionreductions is useful Considering that the carbonmarket is still evolving progress in some respectshas been significant However some problemssurrounding the CDM particularly the facade ofsustainable development need to be properlyaddressed The sustainable development aim of themechanism has been jettisoned in favour of securingplentiful CERs at the lowest possible cost This isunderstandable in the infancy of the CDMHowever for the mechanism to contribute toachieving a lower carbon economy in the long termthere must be a greater emphasis on sustainabledevelopment Projects that aid sustainabledevelopment and lead to decarbonisation ofdevelopment pathways are crucial These are theprojects that will ultimately help change long termpractice and mitigate climate change


144 For example the FSTE 100 index has surged from itslow of 3512 in March to over 5000 now This is a rise ofover 40 per cent See lsquoFTSE 100 Share Price ChartrsquoYahoo Finance Website 17 September 2009 available ath t t p u k f i n a n c e y a h o o c o m q bcs=^FTSEampt=1yampl=onampz=mampq=lampc=

145 Carbon Positive CER Prices may Falter in Late 2009 28August 2009 available at httpwwwcarbonpositivenetviewarticleaspxarticleID=1654

146 David Byers lsquoGordon Brown Left Red-faced inCommons after World Saviour Gaffersquo Times Online10 December 2008 available at httpwww t imeson l ine co uk to lnewspo l i t i c s article5319124ece

147 Carbon Positive EU Carbon Prices Slip from Highs 8July 2008 available at httpwwwcarbonpositivenetviewarticleaspxarticleID=1183

19

The foregoing analysis suggests that infusing genuinesustainable development objectives into a marketmechanism is an impossible task The CDM iscurrently pursuing two seemingly mutuallyexclusive aims This charade should not continueany longer The CDM should decide on which sideof the fence it lies and should not continue in itscurrent schizophrenic state If it is a purely marketmechanism as this paper believes it is this shouldbe explicitly stated and sustainable developmentpursued by other means Such a statement mightbring into question the mechanismrsquos very existenceThis is particularly true if the majority of easyemission reductions have already been made and ifthe awareness of the climate change regime indeveloping countries has been raised In such a casethe CDM might have already outlived its usefulness

In theory another option would be to place moreemphasis on sustainable development at the expenseof pure market forces This makes sense as muchlsquolow lying fruitrsquo has already been picked Thedecarbonisation of the economy ndash as encapsulated inadmittedly imperfect definitions of lsquosustainabledevelopmentrsquo ndash should become a progressively higherpriority as more of the low fruit comes off the treeIn practice this paper has demonstrated the near-impossibility of this route In the longer term it isnecessary to move beyond emission reductions andtowards projects with more sustainable developmentsuch as renewable energy projects Unfortunately theCDM is unlikely to be able to contribute to makingthis shift The CDM will not really facilitate sustainabledevelopment because sustainable developmentguidelines and definitions have not yet been agreed

Market distortions such as issuing more CERs toprojects contributing to sustainable developmentcould in theory be an option In practice suchdistortions would have to be done very slowly andincrementally if at all so as not to erode investorconfidence and certainty This would mean that bythe time the market had been reformed valuable timewould have been lost and development pathwayswould not have been changed Time is not acommodity which the climate regime has inabundance Dawdling and failing to changedevelopment pathways now would be a fatal mistakeThe necessarily incremental nature of marketdistortion precludes this option from solving the

dilemma of sustainable development in the CDMReforming the market should be done swiftly or notat all As the former is not an option CDM marketreform should not be undertaken at all The same istrue for attempting the monetisation of sustainabledevelopment within the CDM In theory this couldbe achieved by greater CER issuance to projects withsustainable development or by giving fewer CERs toprojects with fewer sustainable development benefitsIn practice the chances of achieving an agreement tothis effect remain slim Laborious market reformattempting to reconcile the two irreconcilableprinciples of the market and sustainable developmentwould almost certainly be a waste of time

Finally it is worth noting that the CDM should notbe seen as a vehicle which can cure all the climateregimersquos ills It is just one part of a group of flexibilitymechanisms which are part of a wider climate changeand development framework To be sure someprojects might not be suitable for the CDM andshould instead look for financing from alternativesources such as foreign direct investment and overseasdevelopment assistance It cannot be the soleresponsibility of the CDM for example to initiaterenewable energy projects in developing countrieswhen factors outside the CDM and indeed outsidethe climate change regime also have a part to playThe CDM has seemingly demonstrated it is incapableof doing this anyway The CDM should explicitlyacknowledge its sustainable development failingsAdmitting its limitations might be the only way ofsaving the CDM The policy recommendationsmentioned above regarding improving sustainabledevelopment in the CDM seem impossible to putinto practice The CDM could perhaps play a usefulrole in the future but only in terms of emissionreductions The market mechanism is incapable ofmeaningfully contributing to sustainable developmentThe CDM has already raised awareness in developingcountries and picked some low lying fruit Its workis arguably already done which perhaps spells thebeginning of the end of the CDM Continuing thefacade that the CDM contributes to sustainabledevelopment when it patently does not is asunsustainable as those carbon-intensive developmentpathways that the CDM has so unfortunately failedto alter Sustainable development in the CDM cannotbe improved Arguably its future utility in theclimate regime is thereby disproved


20

LEAD Journal (Law Environment and Development Journal) is jointly managed by theSchool of Law School of Oriental and African Studies (SOAS) - University of London

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LEAD Journal (Law Environment and Development Journal)is a peer-reviewed academic publication based in New Delhi and London and jointly managed by the

School of Law School of Oriental and African Studies (SOAS) - University of Londonand the International Environmental Law Research Centre (IELRC)

LEAD is published at wwwlead-journalorgISSN 1746-5893

The Managing Editor LEAD Journal co International Environmental Law Research Centre (IELRC) International EnvironmentHouse II 1F 7 Chemin de Balexert 1219 Chacirctelaine-Geneva Switzerland Telfax + 41 (0)22 79 72 623 infolead-journalorg





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