Clean Development Mechanism Executive Board Research Articles

Reporting Bias and Monitoring in Clean Development Mechanism Projects*

ABSTRACTThe Clean Development Mechanism (CDM) is a flexible carbon market mechanism managed by the United Nations. The program grants tradable carbon emissions credits (Certified Emission Reductions) for carbon‐reducing projects in developing countries. A project can only be admitted to the program if it is not financially profitable, and thus would not take place without the emission credits granted through the CDM. In this paper, we examine how monitoring reduces incentives of companies to bias the reported expected financial viability of potential CDM projects to gain admission to the program. We find that reported rates of return, which are a key factor for admission to the program, tend to be downwardly biased and are negatively associated with the expected benefits stemming from forecasted greenhouse gas reductions. However, monitoring from various sources mitigates some of the distorted incentives and related reporting bias. Furthermore, the monitoring effect becomes much stronger after 2008, when the CDM Executive Board implemented a series of measures to strengthen the additionality testing that provides guidance for program applications.

Certified Emission Reduction credits and the role of investments

PurposeThis study aims to investigate the cross-sectional and time-series dynamics of realized Certified Emission Reduction (CER) credits issued and the role of investments for a seminal sample of China’s Clean Development Mechanism (CDM) projects specializing in the wind sector.Design/methodology/approachThe study investigates the dynamics of realized CER credits issued and the role of investments using traditional cross-sectional and time-series regression analysis.FindingsThe study results find that the level of investment per megawatt (MW) of power generation is an important predictor for the expected number of realized CER credits issued in the cross-section of China’s wind CDM projects. Additionally, the study finds evidence of time trends and seasonality when examining the time series of realized monthly CER credits: CER credits issued are lower in the summer and higher in the winter.Originality/valueThe study results highlight the importance of financing CDM projects and suggest guidelines in which investors are able to better assess how much to invest based on the anticipated CER credits in the Project Design Document. Additionally, the results suggest opportunities for the CDM Executive Board surrounding the Project Design Document and the anticipated CER credits contained therein. The present study contributes to the literature on strategic tools for addressing climate change and offer insights that narrow the gap between empirical finance and sustainable business practice in the context of CDM projects.

Country variation of Clean Development Mechanism project registration time: an exploratory analysis by the Cox model

Clean Development Mechanism (CDM) is one of the flexibility climate mitigation schemes created under the Kyoto Protocol. The CDM project processing time can be used to indicate capacities of the CDM project proponents, as well as policy regulatory and implementation capacities of host country governments. It is of critical importance to identify and measure factors that greatly affect the competence in the emerging global carbon market. By using the Cox proportional hazards model of survival analysis approach, this study analyzes the processing timing differences among different countries in registering their CDM projects. The study investigates CDM projects that submitted to the CDM Executive Board for registration during the 2004-16 period. By focusing on the top CDM host countries of China, Brazil, India, and Mexico, it involves project type, scale, government supporting level, project submitting phase as covariates into the model. Empirical results indicate that survival analysis provides a novel approach to examine the CDM project processing time by incorporating censored time information into consideration, and the Cox model shows that countries vary in the time spending for project registration, with China averagely spending the shortest time in registration and India taking the longest time.

Examining perspectives and dimensions of clean development mechanism

PurposeThis paper aims to critically evaluate the working of the clean development mechanism (CDM) particularly in developing and least developed countries in the light of recent developments.Design/methodology/approachPart I of the paper delves upon various international rules governing the CDM. Part II of the paper draws out the rationale behind the introduction of the CDM under the Kyoto Protocol so as to provide a basis for its critical assessment in actual practice, as dealt with in Part III. Finally, the paper makes a concluding remark and suggests a way forward.FindingsIt is submitted that the CDM suffers from a gamut of concerns, which need to be adequately addressed. The business-centric approach followed by the investors of CDM projects has been a major reason behind denial of social, economic and environmental benefits pertinent for attaining sustainable development in the developing countries. The urge to derive economic benefits resulting from their investment has made the developing countries more competitive but turn a blind eye to reduced standards maintained for sustainable development. Besides, long-term benefits arising out of such projects, along with greater public participation of local stakeholders in CDM activities, have usually taken a backseat. A need is there to involve the CDM in the agricultural sector, which would have long-term benefits. Besides, it is required to enhance local stakeholder consultation, which ensures that people affected by a CDM project can give a timely, meaningful input to a proposed project. In the 80th meeting of the CDM Executive Board, held in Bonn, it was further decided that the complaints of the local stakeholders shall be given effect through subsequent changes in the project design of the CDM pipeline, along with their consultation before the real start of the project. Greater participation will also be ensured through increased publically available data on CDM projects.Originality/valueThe paper is original and brings out some valuable suggestions to improve the working of the CDM.

The growing influence of the UNFCCC Secretariat on the clean development mechanism

Using principal–agent theory, we explain the effect of an exogenous increase in financial resources on the autonomy of international bureaucracies. This can be empirically demonstrated at the example of the unexpectedly large inflow of fees for the registration of clean development mechanism (CDM) projects and issuance of emission credits on the political influence of staff in the UNFCCC Secretariat. Through document analysis, interviews and econometric analysis, we show that CDM staff was able to gain substantial influence over concrete policy decisions and even change the structure of relevant decision-making and consultation processes. We also show that this may reinforce rather than reduce the role of special interests expressed via country representatives in the CDM Executive Board. While one might be worried about the erosion of democratic principles at the international level, from a normative perspective, the overall effect is difficult to assess. If the international civil service is competent and committed to the delivery of the global public good, its increasing autonomy and influence may also be socially advantageous.

Review of the experience with monitoring uncertainty requirements in the Clean Development Mechanism

In order to ensure the environmental integrity of carbon offset projects, emission reductions certified under the Clean Development Mechanism (CDM) have to be ‘real, measurable and additional’, which is ensured, inter alia, through the monitoring, reporting and verification (MRV) process. MRV, however, comes at a cost that ranges from several cents to €1.20 and above per tCO2e depending on the project type. This article analyses monitoring uncertainty requirements for carbon offset projects with a particular focus on the trade-off between monitoring stringency and cost. To this end, existing literature is reviewed, overarching monitoring guidelines, as well as the ten most-used methodologies are scrutinized, and finally three case studies are analysed. It is shown that there is indeed a trade-off between the stringency and the cost of monitoring, which if not addressed properly may become a major barrier for the implementation of offset projects in some sectors. It is then demonstrated that this trade-off has not been systematically addressed in the overarching CDM guidelines and that there are only limited incentives to reduce monitoring uncertainty. Some methodologies and calculation tools as well as some other offset standards, however, do incorporate provisions for a trade-off between monitoring costs and stringency. These provisions may take the form of discounting emissions reductions based on the level of monitoring uncertainty – or more implicitly through allowing a project developer to choose between monitoring a given parameter and using a conservative default value.Policy relevanceThe CDM Executive Board acknowledged that monitoring uncertainty has not been treated in a consistent manner and the draft standard on uncertainty was subsequently presented in May 2013. This article supports the implementation of this standard for more comprehensive, yet cost-efficient accounting for monitoring uncertainty in carbon offset projects. Moreover, in the light of the ongoing discussions on the New Market Mechanisms as well as the operationalization of the Green Climate Fund and different national mitigation policies, the CDM experience provides valuable insights with regards to the treatment of monitoring uncertainty and constitutes a solid basis for designing uncertainty requirements for new mechanisms to mitigate climate change.

Clean development mechanism of Kyoto Protocol

Purpose – This paper aims to review the developments in India with respect to clean development mechanism (CDM) of Kyoto Protocol to assess the achievements during first Kyoto Protocol period (2008-2012) in climate change mitigation and suggest measure for better participation during the second commitment period. The paper further makes an attempt to explore the experience, concerns and expectations of the Indian project proponents of green projects registered with CDM Executive Board. Design/methodology/approach – This paper employs two methods: informal interviews with executives of World Bank, Designated National Authority (DNA) of India for CDM, leading international CDM consulting firms and a questionnaire survey of Indian CDM projects proponents. Findings – During first commitment period valid up to December 31, 2012, India remained active participant in the CDM, the only mechanism of Kyoto Protocol where developing countries can participate and join in mitigation of climate change, through the development of green projects and thereby earning additional revenue in terms of carbon finance by sale of carbon credits. The study finds out that in the global CDM experience, India's role is striking with its second highest share both in terms of number of projects registered worldwide and in generation of Certified Emission Reductions (CERs). Originality/value – This paper provides several recommendations for strengthening the institutional frame work in India with respect to CDM as well as suggestions to policy makers for consideration while charting out future policies and programs addressing climate change mitigation and adaptation oriented towards better participation in climate change mitigation during the second commitment period of Kyoto Protocol.

Credit for climate mitigation by Amazonian dams: loopholes and impacts illustrated by Brazil’s Jirau Hydroelectric Project

Tropical hydroelectric dams are now one of the main destinations for funds under the Kyoto Protocol’s Clean Development Mechanism (CDM), with 1482 dams approved for credit and 840 dams in the CDM ‘pipeline’ awaiting approval. Thousands of dams are being built by countries such as China, India and Brazil, irrespective of any additional subsidy based on mitigation of climate change. Carbon credit granted to projects that would occur anyway allows the countries purchasing the credit to emit greenhouse gases that are not offset. Damage to global climate is further increased by CDM accounting procedures that undercount the greenhouse gases emitted by tropical dams. Still more damage stems from the limited mitigation funds being squandered on ‘nonadditional’ projects such as dams. An example indicating the need to eliminate credit for hydroelectric dams is provided by the Jirau Dam, now nearing completion on the Madeira River near Brazil’s border with Bolivia. The dam has severe impacts in addition to climate change. The project was approved (registered) by the CDM Executive Board on 17 May 2013.

Development and application of a methodology for a clean development mechanism to avoid methane emissions in closed landfills

In Brazil, Solid Waste Disposal Sites have operated without consideration of environmental criteria, these areas being characterized by methane (CH4) emissions during the anaerobic degradation of organic matter. The United Nations organization has made efforts to control this situation, through the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol, where projects that seek to reduce the emissions of greenhouse gases (GHG) can be financially rewarded through Certified Emission Reductions (CERs) if they respect the requirements established by the Clean Development Mechanism (CDM), such as the use of methodologies approved by the CDM Executive Board (CDM-EB). Thus, a methodology was developed according to the CDM standards related to the aeration, excavation and composting of closed Municipal Solid Waste (MSW) landfills, which was submitted to CDM-EB for assessment and, after its approval, applied to a real case study in Maringá City (Brazil) with a view to avoiding negative environmental impacts due the production of methane and leachates even after its closure. This paper describes the establishment of this CDM-EB-approved methodology to determine baseline emissions, project emissions and the resultant emission reductions with the application of appropriate aeration, excavation and composting practices at closed MSW landfills. A further result obtained through the application of the methodology in the landfill case study was that it would be possible to achieve an ex-ante emission reduction of 74,013 tCO2 equivalent if the proposed CDM project activity were implemented.

Standardization of baseline and additionality determination under the CDM

Clean Development Mechanism (CDM) project developers have long complained about the complexities of project-specific baseline setting and the vagaries of additionality determination. In response to this, the CDM Executive Board took bold steps towards the standardization of CDM methodologies, culminating in the approval of guidelines for the establishment of performance standards in November 2011. The guidelines specify a performance standard stringency level for both baseline and additionality of 80% for several priority sectors and 90% for all other sectors. However, an analysis of 14 large-scale CDM methodologies that use performance standard approaches challenges this top-down approach to the performance standard design. An appropriate performance standard stringency level strongly depends on sector and technology characteristics. A single stringency level for baseline and additionality determination is appropriate only for greenfield projects, but not for retrofit ones. Overly simple, highly aggregated performance standards are unlikely to ensure high environmental integrity, and difficult questions regarding stringency and updating frequency will eventually have to be addressed on a rather disaggregated level. A careful balance between data requirements and the practicability of performance standards is essential because the heavy data requirements of the existing performance standard methodologies have been the key barrier to their actual implementation. Policy relevance CDM regulators have been pushed by many stakeholders to standardize baseline setting and eliminate project-specific additionality determination. At first glance, performance standards seem to provide the perfect solution for both tasks. However, a one-size-fits-all political decision – e.g. the average of the top 20% performers as enshrined in the Marrakech Accords – is inappropriate. Substantial disaggregation of performance standards is required both technologically and geographically in order to limit over- and under-crediting and close loopholes for non-additional projects. As a lack of reliable and complete data has been and will be a key bottleneck for the development of performance standards, international support for data collection will be indispensable, but costly, and time-consuming. Empirically driven, techno-economic assessments of performance standard stringency levels must be the central task of the future work on standardized methodologies, and should not be sidelined by perceived needs of policy makers to take bold decisions under time pressures.

Clean development mechanism as a solution to the present world energy problems and a new world order: a review

One of the important responses of Kyoto Protocol towards mitigation of global warming is the clean development mechanism (CDM) that has garnered large emphasis amidst the global carbon market in terms of certified emission reduction (CER). CERs are the carbon credits issued by the CDM executive board for emission reductions achieved by CDM projects and verified by designated operational entity (DOE) under the rules of the Kyoto Protocol. While CDM aims to achieve sustainable development in energy production and consumption in developing countries, the results achieved through its implementation are still uncertain. More than 400 studies have been undertaken since 1997 on the CDM. Albeit, hitherto no compilations of key issues pertaining to the CDM and different points of views on its implementation and achievement have been attempted. This paper envisages to assess the contributions of the CDM towards sustainable development and its impact in various sectors.

What is the carbon emission factor for the South African electricity grid?

One of the most important parameters for developing Clean Development Mechanism (CDM) project proposals in the electricity sector (both supply and efficiency) is the standard electricity ‘grid emission factor’, which represents the carbon dioxide related to a megawatt hour of electricity supplied or saved on the grid. While there are detailed guidelines from the CDM Executive Board on how to calculate this emission factor, the values used in registered CDM projects in South Africa vary widely, both due to changes in the rules over time and also to misapplication of the rules. This paper shows how the application of the latest guidelines gives a ‘combined margin emission factor’ for South Africa of 0.957 tCO2/MWh in 2009/2010. The variation in emission factors in the literature, as well as the importance of reducing the transaction costs for South African project developers, points to the need for an official published grid emission factor from the CDM host country authority in South Africa, the Designated National Authority (DNA), within the Department of Energy.

An Inconvenient Truth-Global Warming on Greenhouse Gas (GHG) Reduction under Kyoto Protocol Regime to Post Kyoto Protocol in ASIA

Global regime on Greenhouse Gas (GHG) reduction has changed at the end of 2009. Clean Development Mechanism (CDM) has revealed some critical defects and all participants recognize less profit than they had expected and are disappointed with agricultural fields. There are 2 issues that brought less profit - Price of GHG and Verification before Certified Emissions Reductions (CERs) would be issued by the CDM Executive Board and credited to the participants of a project. Therefore, at the end of 2009, Bilateral Offset Mechanism has launched, which could be considered to be revised CDM. However, in the agricultural field, no precedent has been shown between Japan and Asian countries. Under Kyoto Protocol Regime, United Nation CDM executive board has adopted baseline method and not adopted Life-cycle Assessment (LCA) method. Under Bilateral Offset Mechanism, however, LCA method might be adopted, if 2 participants agreed LCA method in stead of baseline method.5 scenarios would be compared on GHG reduction by LCA method, because LCA method might be used under Bilateral Offset Mechanism or Post Kyoto Protocol Regime.Reduced greenhouse gas (GHGs; CO2, CH4, and N2O) emissions of the alternative systems instead of conventional systems were estimated by using LCA method preparing for Bilateral Offset Mechanism or Post Kyoto Protocol (post-Kyoto) regime. If GHG from the agricultural sector in developed countries would be taken into account on Bilateral Offset Mechanism or post-Kyoto Protocol Regime, reduced GHG from the agricultural sector in developed countries could be available.

Making Carbon Offsets Work in the Developing World: Lessons from the Chinese Wind Controversy

The Clean Development Mechanism (CDM) is the leading international carbon market and a driving force for sustainable development globally. But the eruption of controversy over offsets from Chinese wind power has exposed cracks at the core of how carbon credits are verified in developing economies. It has become almost impossible to determine whether offsets from Chinese wind are additional and that they in fact represent real reductions beyond business as usual. Unless this problem can be resolved, it threatens to spread beyond wind in China and could threaten the ability of carbon markets to deliver the mitigation demanded by international climate policy.In 2009 the CDM Executive Board (EB) shocked the carbon market by forcing an unprecedented review of whether multiple Chinese wind projects satisfied UNFCCC additionality requirements. CDM investors reeled as the safest CDM bet became the riskiest; the Chinese government publicly criticized the UN's oversight of carbon markets; and the CDM EB prepared itself for an unprecedented fight over how carbon offsets could be verified in the world's largest CDM market.When the EB observed decreases over time in power tariffs granted by China's National Development and Reform Commission (NDRC) to wind projects, it became concerned that China might be manipulating power tariffs in order to guarantee additionality and subsidize its domestic wind development with international finance. If the Chinese government were controlling additionality, then the CDM's ability to validate carbon offsets would be dealt a near‐lethal blow because the problems posed by Chinese wind extend to nearly all power sector projects in almost every developing country. If offsets cannot be credibly verified, then the integrity of emissions caps set by the Kyoto Protocol is directly threatened.The Chinese wind controversy therefore has direct implications for the design and negotiation of any successor to the Kyoto Protocol. Despite largely failed negotiations in Copenhagen, the design of reliable, efficient carbon markets remains the world's most serious prospect for international cooperation. The developed world has committed USD 30 billion in climate aid by 2012, but the majority of these funds will likely have to be private capital delivered through markets. In order for carbon markets to avoid controversy and function effectively, the lessons from the Chinese wind controversy must be used to implement key reforms.This report examines the application of additionality in the Chinese wind power market and draws implications for the design of effective global carbon offset policy. It demonstrates the causes of the wind power controversy, highlights underlying structural flaws in how additionality is applied in China, and charts a reform path that can strengthen the credibility of global carbon markets.

Dysfunctional delegation: why the design of the CDM's supervisory system is fundamentally flawed

The supervisory system of the Kyoto Protocol's Clean Development Mechanism (CDM) has been heavily criticized for not being able to guarantee the additionality of projects. Since neither the sellers nor the buyers of emission reduction credits in the CDM have an interest in the emissions reductions per se, but simply the right to them, a credible supervisory system is necessary to uphold the mechanism's integrity. In the CDM, the on-the-ground supervision of projects has been delegated to the Designated Operational Entities (DOEs), which are private companies accredited by the CDM Executive Board (EB) to perform this task. But, as the DOEs are selected and paid by the project developers themselves, they have an economic incentive to let projects through to gain a favourable reputation among clients. Taking its starting point in delegation theory, this article argues that the supervisory system of the CDM is fundamentally flawed, since its design is incompatible with basic theoretical insights from this literature. It concludes that a thorough reform of the CDM's supervisory system is needed in order to increase its credibility. First, the EB should select and pay the DOEs. Second, the current rules for determining additionality should be replaced so as to reduce the arbitrariness of decisions.

A Study on Measures to Activate CDM Taking Project Risks into Consideration

Global warming has been recognized as a serious issue since the fourth assessment report of the Intergovernmental Panel on Climate Change was published in 2007. Under these circumstances, Clean Development Mechanism (CDM) is expected to play a significant role, since it promises to reduce the economic gaps between developed and developing nations, as well as to economically reduce greenhouse gas emissions. In this paper, we first investigate how to evaluate risks in CDM. The real option theory is applied to quantify project risks in CDM, so that we can estimate the option values. In detail, a mathematical model of CDM is represented with a compound rainbow option, which includes continuous procedures from registration to investment. The evaluated results identify the condition of profitability, in which investment as CDM project is feasible. Our evaluation also quantifies how CDM projects become difficult to be executed due to the registration risk and the post-2012 risk. Then we investigate how to activate CDM projects. For this purpose, two options are considered: low interest loans by official financial institutions and the procurement of certified emission reductions, (CERs) by governments. The former relates to the low interest loans similar to environmental official development assistance (ODA), which certainly ease the financial burden of initial investments in CDM projects. Now that CDM projects related to ODA are already registered by CDM executive board, this option is worth evaluation. The latter, meanwhile, aims at lowering risks by the secure purchase of CERs by governments. Since the governments of the Netherlands and Japan have already established a system to purchase CERs generated by CDM, we need to assess the effect of the option to activate CDM. Based on actual financial data on CDM, we finally investigate how these options could increase the number of executable CDM projects.

Varieties of Carbon Governance in Newly Industrializing Countries

Recently established carbon governance systems are quite different in Brazil, China, and India. Such divergence is surprising as emerging economies are primarily involved in carbon governance through the clean development mechanism (CDM). One would expect similar institutional and policy outcomes in the major host countries in response to the CDM, as this market instrument is initiated primarily by Western companies and regulated hierarchically by the internationally governed CDM Executive Board. However, from a closer look at the developing features of the CDM markets in Brazil, China, or India and an analysis of dominant actors and their interactions, institutional responses, and the effectiveness of the CDM within each market, there is evidence of a high variance, combined with a strong ownership by the respective governments. Such a variety of carbon governance is interesting from a theoretical point of view as it shows that a good understanding of environmental governance patterns is still lacking in developing and emerging economies. It is also of political importance as the findings may help to diffuse some of the criticism leveled at the CDM.

What determines UN approval of greenhouse gas emission reduction projects in developing countries?

The Clean Development Mechanism (CDM), established by the Kyoto protocol, can generate substantial rents for project participants via the sale of Certified Emission Reductions. For this reason, supposedly technical decisions about the approval of CDM methodologies and about the registration of projects may be driven by benefits to specific countries or interest groups. Our econometric analysis of data for about 250 methodologies and about 1000 projects discussed by the CDM Executive Board (EB) so far, suggests that indeed, along with formal quality criteria, political-economic variables determine the final EB decision.

Behavior-Based Transportation Greenhouse Gas Mitigation under the Clean Development Mechanism

This paper proposes a methodology, consistent with the Kyoto Protocol's clean development mechanism (CDM), to quantify the greenhouse gas (GHG) emission reduction benefits of transport-efficient development (TED). TED aims to reduce transportation GHGs by changing urban development patterns. The Nanchang Transit-Oriented Development project in China is used to demonstrate the methodology and the possibilities for bringing such projects into the carbon market. The case illustrates the challenges of using the CDM to reduce transportation GHG emissions via TED. The proposed analytical approach, utilizing a control group, encounters difficulties with geographical control, the reliability of the statistical techniques, and challenges to calculating emissions “leakage.” These methodological difficulties also affect financial viability because of high monitoring costs and high project risks. Ultimately, the CDM executive board rejected the proposed methodology, suggesting limited possibilities for utilizing today's carbon market to alter developing countries’ urban transportation GHG growth trajectories.

Exploring the clean development mechanism: Malaysian case study

During 2006 the CDM market in Malaysia became established and by December 2007 a total of 20 Malaysian projects had registered with the CDM Executive Board. The Kyoto Protocol defines the Annex 1 countries, as countries that are obliged to reduce their greenhouse gas (GHG) emissions and the clean development mechanism (CDM) allows Annex 1 countries to develop projects, which contribute to emission reduction, in non-Annex 1 (developing) countries. Currently, two projects have been corrected due to request for review and there is one project for which review is requested. Two projects have been rejected by the Executive Board. The broad knowledge of CDM in Malaysia and the number of successful projects are partly due to the well-functioning CDM institutional framework in Malaysia. As an illustration this article focuses on a Malaysian-Danish project and describes the implementation of CDM in Malaysia and refers to this specific project. The project was registered with the CDM Executive Board in May 2007 and is a methane avoidance project in which methane is captured from a landfill and used to generate electricity.